2015 (7) TMI 1231 - AT - Income Tax

Interest income considered as income from other sources - interest on FDRs - claim of the assessee that the impugned interest income is a capital receipt which is permissible to be set-off against the capital work-in-progress - Held that - It is quite apparent that the funds deployed in FDRs are tied up funds and not surplus funds. Rather, in my considered opinion, the impugned funds are inextricably linked to the development and construction of assessee s project of integrated market complex at White Field, Bangalore. In the background of the aforesaid factual position, in my view, the income on FDRs is required to be capitalized to be reducd from the capital work-in-progress, and is fully covered by the ratio of the judgment of the Hon ble Supreme Court in the case of CIT v/s Bokaro Steel Ltd., 1998 (12) TMI 4 - SUPREME Court , and not by the judgment of Hon ble Supreme Court in Tuticorin Alkali Chemicals & Fertilisers Ltd. (1997 (7) TMI 4 - SUPREME Court a), as contended by the Revenue. Thus conclude by holding that the assessee has rightly reduced the said interest income from the capital work-in-progress, because the funds deployed are only for an ultra short period which in inextricably linked with the project. Hence, set aside the impugned order passed by the learned Commissioner (Appeals) and hold that the addition needs to be deleted. - Decided in favour of assessee.

Summary

Issues:
1. Tax treatment of interest income earned on fixed deposits in relation to project development expenses.
2. Allowance of deduction under section 57 of the Income Tax Act.

Analysis:
1. The appeal addressed the tax treatment of interest income of Rs. 7,35,675 earned by the assessee on fixed deposits from Corporation Bank. The Assessing Officer disallowed netting off the interest against project development expenses as the business had not commenced during the assessment year. The assessee argued that the interest income was linked to the capital work-in-progress for an integrated market complex and should be allowed as a deduction under section 57 of the Act. The Assessing Officer relied on the Tuticorin Alkali Chemicals case, holding the interest income as taxable under section 56.

2. The assessee contended that the interest income was inextricably linked to the project's setup and should be treated as a capital receipt, citing the Indian Oil Panipat Power Consortium case. The Tribunal noted the short-term nature of the fixed deposits and the purposeful deployment of funds for the project. The Tribunal distinguished between surplus funds and those linked to the project, following the Bokaro Steel Ltd. judgment. It held that the interest income should be capitalized and reduced from the capital work-in-progress, contrary to the Tuticorin Alkali Chemicals case.

3. The Tribunal found that the interest earned on fixed deposits was not from surplus funds but funds directly tied to the project, aligning with the Bokaro Steel Ltd. judgment. Therefore, it allowed the appeal, deleting the addition of Rs. 7,35,675 from the capital work-in-progress. The alternate plea for deduction under section 57 was deemed infructuous due to the success on the main issue. Consequently, the appeal was partly allowed.

This detailed analysis of the judgment highlights the key legal arguments, precedents cited, and the Tribunal's reasoning in deciding the tax treatment of interest income in the context of project development expenses.