2012 (10) TMI 524 - HC - Income Tax

Interest earned on deposits and advances made for the new unit being established - Revenue OR Capital receipt - Held that - As decided in INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED, NEW DELHI Versus INCOME TAX OFFICER 2009 (2) TMI 32 - DELHI HIGH COURT when the interest was received by the assessee towards interest paid for fixed deposits & when the borrowed funds could not be immediately put to use for the purpose for which they were taken, the receipt is inextricably linked to the setting up of the project, it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. The Tribunal and the lower authorities fell into error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject matter of the present appeal, would have to be treated as revenue receipt as the funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may be added that the Tribunal has not found that the deposits made as margin monies were not limited to the construction activity connected to the expansion of the business by way of setting up of a new power generation plant - in favour of assessee.

Issues Involved:
1. Whether the interest of Rs. 3,31,58,000/- earned on deposits and advances made for the new unit should be set off against the interest on borrowed sums utilized for the new unit or treated as "income from other sources."

Issue-wise Detailed Analysis:

1. Nature of Interest Earned on Deposits and Advances:
The primary issue was whether the interest earned on deposits and advances made for the new unit should be considered as a capital receipt or as "income from other sources." The assessee argued that the interest earned should be netted off against the interest on borrowed sums utilized for the new unit. The Assessing Officer, however, treated this interest as "income from other sources," relying on the Supreme Court judgment in Tuticorin Alkalies Chemicals Fertilizers Ltd. vs. CIT.

2. Tribunal's Reasoning and Lower Authorities' Decisions:
The Tribunal upheld the Assessing Officer's decision, stating that the interest earned on fixed deposits made from surplus funds and margins/advances for expansion should be assessed under the head "income from other sources." The Tribunal reasoned that the amendment to section 36(1)(iii) of the Income Tax Act with effect from 1-4-2004, which disallowed interest paid on borrowed capital for acquisition of an asset for extension of existing business, was applicable.

3. Assessee's Argument:
The assessee contended that the interest earned was inextricably linked with the construction activity and should be considered a capital receipt, citing the Supreme Court's decision in Commissioner of Income Tax v. Bokaro Steel. They argued that the amendment to section 36(1)(iii) did not affect the principle that interest earned on borrowed capital linked with construction is a capital receipt.

4. Revenue's Argument:
The revenue argued that the Tribunal's decision was correct, emphasizing that the interest earned on fixed deposits should be treated as "income from other sources" based on the Supreme Court judgment in Tuticorin Alkalies. They contended that the principle of netting of interest was inapplicable in this case.

5. Court's Analysis and Judgment:
The Court analyzed the amended section 36(1)(iii) and relevant Supreme Court judgments, including Tuticorin Alkalies and Bokaro Steel. It noted that if the receipt is "inextricably linked" to the setting up of the project, it would be a capital receipt not liable to tax but would reduce the cost of the project. The Court found that the interest earned on fixed deposits of borrowed amounts was inextricably linked with the setting up of the power plant and should be treated as a capital receipt.

6. Conclusion:
The Court concluded that the Tribunal and lower authorities erred in holding that the interest earned on fixed deposits should be treated as revenue receipt. The interest earned on deposits and advances made for the new unit should be set off against the interest on borrowed sums utilized for the new unit. The appeal was allowed in favor of the assessee.

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