Capital or Revenue, Business Income, Construction Company, Netting of Receipts and Payments, Amounts Received by the Assessee Would Go to Reduction of Cost of Construction: The Supreme Court

The Supreme Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315/102 Taxman 94/151 CTR 276 (SC) held that as per S. 4 of Income Tax Act : Charge of income tax – Capital or revenue- Business income – Receipts from Construction company – Netting of receipts and payments- Receipts from the Construction Company being intrinsically connected with construction of assessee’s plant, would be considered as a capital receipt and not income of assessee from any independent source-Amounts received by the assessee would go to reduction of cost of construction.


The Government of India is the only shareholder in the assessee, which is a company. It was evaluated concerning its standing as a firm. Bokaro Steel Ltd., the firm being evaluated, was established as a legal entity in January 1964. Its purpose was to build and eventually own a fully integrated iron and steel industry.

During the evaluation years that were being taken into account, the work of constructing the company’s factory and installing the machinery was getting close to being finished. During the year, the assessee was given certain sums of money by the contractors as payment for providing housing accommodations for construction workers, hire charges of plant and machinery, interest on advance payments, and royalties for the excavation and use of stone that was found on the assessee’s land. According to the decision of the Tribunal, all of the money that the assessee brings in will be used for the reduction of the building costs.


Would the revenue receive from the Construction Company, which is inextricably linked to the building of the assessee’s plant, be included as a capital reception, rather than the income that the assessee earns from any other source?


This is the rent that the assessee charges to its contractors for housing employees and staff that the contractor employs for the building work of the assessee. This rent may include specific facilities that are supplied to the workforce by the assessee. Secondly, hiring costs for equipment and machinery that were supplied to the contractors by the assessee to utilize the assessee’s construction work, and thirdly, interest on advances granted to the contractors by the assessee to make the construction work easier to complete.

The actions of the assessee in connection with all three of these revenues are either directly related to or are ancillary to the activity that the assessee is doing in connection with the building of its plant. In a general sense, they are related to the agreements that the assessee made with its contractors on the work that was being done on the building project. The contractor was granted permission by the assessee to utilize the premises of the assessee to house its employees and workers who were involved in the building activity of the assessee’s plant. This was done to make the job of the contractor easier. It was obvious that this was done to make the process of a building easier. If this facility had not been supplied by the assessee, the contractors would have been responsible for making their arrangements, and the cost of these preparations would have been included in the prices that the contractors charged for the building work.

Instead, the assessee has been responsible for the provision of these amenities. The same is true for the hiring rates for equipment and machinery that the assessee gave to the contractors for the building work that the assessee had done. The assessee is additionally compensated for the wear and tear that the equipment has sustained thanks to the receipts related to this matter. The purpose of the advances that the assessee provided to the contractors to facilitate the construction activity of putting together a very large project was just as much to help the contractors as it was to ensure that the work that the contractors did proceed without any financial difficulties.


When it comes to these three receipts, the agreements that were established between the assessee business and the contractors are arrangements that are inextricably linked to the development of the steel factory that the assessee company is responsible for. The payments received have been subtracted from the amounts owed to the contractors, which has resulted in a decrease in the overall cost of the building. As a result, they have been properly classified as capital receipts, and the assessee has not been required to account for them as income from any independent source.

Order Reviewed by Jay Kumar Gupta

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