2012 (1) TMI 25 - HC - Income Tax

Dis-allowance of interest expense from allegadly interest income by Revenue assessee, wholly owned subsidiary of Power Finance Corporation (PFC) was incorporated as a special purpose vehicle (SPV) for inviting bids for construction and building of an ultra mega power project - Commitment Advance received from Power Procurement Utilities of the States concerned transferred to PFC - PFC paid interest on the unutilized Commitment Advance - interest paid to the Power Procurement Utilities on the Commitment Advance reduced from interest income received from PFC credited to the capital work in progress - Held that - CIT (Appeals) and Tribunal have specifically held that the interest income & interest expense, both were on capital account. This is not a case of surplus funds, which were available and investment were made in fixed deposits to earn interest. The interest paid to the power procurement utilities on commitment advances was capitalized. Interest paid and interest received were inextricably linked and have a commonality about their nature and character. They cannot be treated differently. - Decided against the Revenue

Summary

Issues:
- Disallowance of interest expenses
- Nature of interest income received from PFC

Disallowance of Interest Expenses:
The case involved an appeal by the Revenue under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal (ITA) regarding the disallowance of interest expenses of Rs.1,36,11,665/- for the assessment year 2007-08. The respondent-assessee, a subsidiary of Power Finance Corporation (PFC), was created as a special purpose vehicle (SPV) for a power project. The SPV received Commitment Advance from Power Procurement Utilities, which was transferred to PFC. PFC paid interest on the unutilized Commitment Advance, which was credited to "capital work in progress." The Assessing Officer disallowed the interest expenses, holding that the interest paid was on capital account but the interest received was taxable under Section 57 of the Act. However, the Commissioner of Income Tax (Appeals) allowed the respondent-assessee to raise the contention that the interest received from PFC was capital in nature. The tribunal, after examining the factual position, held that the interest income was capital in nature and not taxable under Section 57 of the Act, following precedents like the Indian Oil Panipat Power Consortium case.

Nature of Interest Income Received from PFC:
The tribunal analyzed the agreement between PFC and the assessee, where PFC incurred the expenditure on the project until receiving Commitment Advance from power utilities. The unutilized portion of the advance was placed with PFC as an inter-corporate loan, and interest was receivable from PFC. The tribunal observed that the interest income and expenditure were inextricably linked to the project's setup, and both were considered capital in nature. The tribunal emphasized that the interest received on unutilized commitment advances cannot be taxed as revenue income, while the interest paid on commitment advance was treated as a capital expense. The factual findings of the Commissioner of Income Tax (Appeals) and the tribunal were not challenged, leading to the dismissal of the appeal. The tribunal concluded that no substantial question of law arose from the order, and the appeal was dismissed.

In summary, the judgment addressed the disallowance of interest expenses and the nature of interest income received from PFC. The tribunal upheld that the interest income was capital in nature, not taxable under Section 57 of the Act, and linked to the project's setup. The decision relied on precedents and factual analysis, leading to the dismissal of the appeal without costs.