2011 (6) TMI 872 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of interest on security deposit.
2. Accrual of income.
3. Set-off of interest income against preoperative expenditure.
4. Presumption of interest rate on security deposit.

Detailed Analysis:

1. Taxability of Interest on Security Deposit:
The core issue in this appeal is whether there was an accrual of income by way of interest on a security deposit placed by the assessee company with the Madhya Pradesh Electricity Board (MPEB). The assessee company entered into a Power Purchase Agreement (PPA) with MPEB, which required a security deposit of 2% of the project cost. The financial closure was to be achieved within two months of providing a bankable escrow agreement. The security deposit was to be returned with interest upon achieving financial closure, failing which it would be forfeited. The MPEB failed to provide a bankable escrow agreement, leading to the forfeiture of the security deposit. The assessee requested a refund with interest, but MPEB refused, leading to legal disputes. The Hon'ble High Court quashed the forfeiture order and directed MPEB to provide a bankable escrow agreement or refund the deposit with interest. However, the matter was sub judice, and the assessee ultimately accepted the forfeiture for commercial reasons.

2. Accrual of Income:
The Assessing Officer held that income had accrued to the assessee as the High Court's decision directing MPEB to refund the deposit with interest remained in force until the SLP was withdrawn. The assessee's decision to forgo the deposit was seen as a commercial decision. The Commissioner (Appeals) upheld this view, stating that interest would accrue on the deposit until its forfeiture in the assessment year 2003-04. The Tribunal, however, concluded that no income accrued to the assessee as the right to receive interest was contingent upon achieving financial closure, which never occurred. The Tribunal relied on the real income theory and several legal precedents to hold that no real income accrued to the assessee due to the ongoing dispute and the lack of a bankable escrow agreement.

3. Set-off of Interest Income Against Preoperative Expenditure:
The assessee argued that, if interest income had accrued, it should be set off against the cost of the project. The Commissioner (Appeals) rejected this contention, citing the Supreme Court's decision in Bongaigaon Refinery & Petrochemicals Ltd. v/s CIT, which stated that there was no direct link between the interest income and construction expenditure. The Tribunal did not adjudicate this alternative ground as it allowed the primary ground, making the issue academic.

4. Presumption of Interest Rate on Security Deposit:
The Assessing Officer presumed an interest rate of 9% on the security deposit. The Tribunal did not specifically address this issue as it held that no income by way of interest had accrued to the assessee.

Conclusion:
The Tribunal concluded that no income by way of interest on the security deposit with MPEB accrued to the assessee in the assessment years under consideration due to the ongoing dispute and the lack of a bankable escrow agreement. The appeals were allowed in favor of the assessee, and the alternative grounds were not adjudicated as they were rendered academic.