2016 (3) TMI 1232 - AT - Income Tax

Appeal to produce additional evidence - interest earned was on the FDRs - Held that - In the present case we see that in order to bring out the fact on record whether the funds are inextricably linked to the setting up of plant or not. These evidences which are filed before us under Rule 29 are very important. The fact remains that the assessee has not taken any new plea and the same has been taken all along before the lower authorities. We find that there is a substantial cause for admitting these evidences and we hereby admit these evidences and send the matter back to the file of the Assessing Officer to consider the same and decide the issue as per law. If it is found that the funds were deployed for some reason which is inextricably linked with the setting up of the plant and not for running the plant then relief be given to the assessee otherwise the stand taken by the Assessing Officer in first round may be confirmed. Appeal of the assessee allowed for statistical purposes.

Issues Involved:

1. Taxability of interest income on Fixed Deposit Receipts (FDRs).
2. Classification of bank guarantees related to plant operation or setup.
3. Linkage of interest earned on FDRs with the cost of capital work-in-progress.
4. Deduction of interest expenditure on borrowed funds.
5. Computation of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income on FDRs:

The primary issue was whether the interest income of Rs. 2,14,35,213/- earned on FDRs should be taxed under the head 'Income from Other Sources'. The Assessing Officer (AO) held that since the business had not commenced, the interest income should be taxed as 'income from other sources'. The assessee contended that the interest earned was inextricably linked to the setup of the power plant and should be capitalized, citing judgments such as Indian Oil Panipat Power Consortium Ltd. Vs. ITO, CIT Vs. Bokaro Steel Ltd., and NTPC SAIL Power Company Pvt. Ltd. Vs. CIT. However, the AO relied on the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT, which ruled that interest earned on surplus funds should be taxed as 'income from other sources'.

2. Classification of Bank Guarantees:

The assessee argued that the FDRs were kept as margin money to secure bank guarantees essential for coal linkage, which was a pre-condition for setting up the power plant. The CIT (Appeals) held that the bank guarantees were for the operation of the plant, not its setup, and confirmed the AO's addition. The assessee reiterated that the guarantees were crucial for securing fuel linkage, an integral part of the plant's construction.

3. Linkage of Interest Earned on FDRs with the Cost of Capital Work-in-Progress:

The assessee contended that the interest earned on FDRs should be reduced from the cost of capital work-in-progress, as it was linked to the plant's setup. The CIT (Appeals) and AO disagreed, treating the interest as unrelated to the business activity since the business had not commenced. The Tribunal referred to various judgments, including the Delhi High Court's in Indian Oil Panipat Power Consortium Ltd., which emphasized that if funds are inextricably linked to the setup of the plant, the interest earned should be capitalized and set off against preoperative expenses.

4. Deduction of Interest Expenditure on Borrowed Funds:

The assessee sought a deduction for the interest expenditure on borrowed funds to the extent of the interest income on FDRs. This issue was not specifically addressed in the judgment but was part of the broader argument that the interest earned and paid were linked to the plant's setup.

5. Computation of Interest Under Section 234B:

The assessee also contested the computation of interest under section 234B amounting to Rs. 32,78,621/-. This issue was not elaborated upon in the judgment but was part of the grounds of appeal.

Additional Evidence:

The assessee filed an application for additional evidence under Rule 29 of the Income Tax Appellate Tribunal Rules, including letters exchanged with South Eastern Coalfields Ltd., bank guarantee confirmation letters, and other related documents. The Tribunal admitted the additional evidence, noting that it was essential to determine whether the funds were inextricably linked to the plant's setup.

Tribunal's Decision:

The Tribunal concluded that the additional evidence was crucial to establish the linkage between the funds and the plant's setup. The matter was remanded to the AO to consider the new evidence and decide whether the funds were used for setting up the plant or its operation. If the funds were linked to the setup, the interest earned should be capitalized and set off against preoperative expenses; otherwise, the AO's original decision would stand.

Conclusion:

The appeal was allowed for statistical purposes, with the matter sent back to the AO for reconsideration based on the additional evidence provided by the assessee. The Tribunal emphasized the importance of determining whether the funds were inextricably linked to the plant's setup to decide the correct tax treatment of the interest income.

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