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2011 (3) TMI 309 - HC - Income TaxAddition - Interest on FDRs - Capital or revenue in nature - the very award of the contract to the assessee rested on providing a performance guarantee in terms of the agreement and therefore there is an inextricable link between the furnishing of the performance guarantee and the execution of the contract - It is further contended that furnishing of bank guarantee at the pre-operative or pre-commencement period cannot be given emphasis totally brushing aside the real crux that submission of performance guarantee is the sine qua non for the purpose of entering into business and to sustain the business expediency - The non-submission of the guarantee would have entailed termination of the agreement and NHAI would have been at liberty to appropriate the bid security - it is clearly evincible that the bank guarantee was furnished as a condition precedent to entering into the contract and further it was to be kept alive to fulfil the obligations - interest earned by the assessee on the FDRs has intrinsic and inseggregable nexus with the work undertaken and therefore the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources - Decided in favour of the assessee
Issues Involved:
1. Justification of the Income-tax Appellate Tribunal's decision to delete the addition of Rs. 16,36,039 by treating the interest earned on fixed deposit receipts as capital in nature and not as income from other sources. Detailed Analysis: Issue 1: Justification of the ITAT's Decision on Interest Earned on Fixed Deposit Receipts Relevant Facts: - The respondent-assessee filed a return of income for the assessment year 2003-04, declaring nil income. - The Assessing Officer framed an assessment determining the total income at Rs. 16,38,039, treating the interest income from fixed deposits as income from other sources, and disallowed its set-off against project expenses. - The fixed deposits were made to furnish a performance guarantee to the National Highways Authority of India (NHAI) for a BOT (Build-Operate-Transfer) project. Contentions: - The assessee argued that the interest on margin money for the bank guarantee was intrinsically linked to the execution of the contract and should be set off against the project expenses. - The Assessing Officer relied on the decision in *Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT* [1997] 227 ITR 172 (SC), holding that the interest earned was taxable as income from other sources. First Appellate Authority's Decision: - The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, stating that the interest income earned on the margin money for the performance guarantee was income from other sources and could not be set off against project expenses. Tribunal's Decision: - The Tribunal found that the interest earned on the fixed deposits had an intrinsic and inseparable nexus with the project work, deeming it capital in nature and thus allowed the set-off against project expenses. High Court's Analysis: - The court examined various precedents, including *Tuticorin Alkali Chemicals and Fertilizers Ltd.*, *CIT v. Bokaro Steel Ltd.* [1999] 236 ITR 315 (SC), and *CIT v. Karnal Co-operative Sugar Mills Ltd.* [2000] 243 ITR 2 (SC). - In *Tuticorin Alkali Chemicals*, the interest earned on surplus funds was treated as income from other sources. - In *Bokaro Steel Ltd.*, the interest on advances during the construction period was considered capital receipt, as it was inextricably linked to the setting up of the plant. - In *Karnal Co-operative Sugar Mills Ltd.*, interest earned on deposits linked to the purchase of machinery was deemed incidental to the acquisition of assets. Conclusion: - The court concluded that the performance guarantee was a condition precedent for entering into the contract with NHAI and was not a case of surplus funds lying idle. - The interest earned had an inextricable nexus with securing the contract, aligning with the principles in *Bokaro Steel Ltd.*, *Karnal Co-operative Sugar Mills Ltd.*, and *Koshika Telecom Ltd.* [2006] 287 ITR 479 (Delhi). - Therefore, the Tribunal's view that the interest earned was capital in nature and should be set off against project expenses was upheld. Judgment: - The appeal was dismissed, affirming the Tribunal's decision, with no substantial question of law involved. Summary: The High Court upheld the ITAT's decision to treat the interest earned on fixed deposits, made for furnishing a performance guarantee to NHAI, as capital in nature. The court found that the interest had an inextricable nexus with the project work, thereby allowing its set-off against project expenses and dismissing the appeal without any order as to costs.
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