2014 (4) TMI 559 - HC - Income Tax

Nature of income - Interest earned on margin money - Whether the interest earned by the assessee on the margin money deposited by it for borrowing amounts to finance its expansion i.e. setting-up of 9th Boiler Project for generation of power was capital in nature Held that - The interest received is inextricably linked with the construction of the power project, in as much as the loan was utilized to make advances linked to the expansion - The margin money from which the interest was earned was placed for the purpose of taking the loan - The loan was given for the purpose of expansion Relying upon CIT vs. Bokaro Steels Ltd. 1998 (12) TMI 4 - SUPREME Court - the Tribunal s approach and finding cannot be faulted and no question of law arises decided against Revenue.

Summary

Issues:
1. Whether interest earned by the assessee on margin money deposited for borrowing amounts to finance its expansion is capital in nature.

Analysis:
The issue in this case revolves around the nature of interest earned by the assessee on margin money deposited for borrowing to finance its expansion project. The assessing officer sought to add back the interest earned from the margin money deposited with the bank for setting up another boiler plant. The CIT (Appeals) accepted the assessee's appeal, citing precedents like CIT vs. Sasan Power Ltd. and Indian Oil Panipat Power Consortium Ltd. The CIT (Appeals) emphasized that interest linked to setting up a project is capital receipt not liable to tax. The High Court of Delhi in the case of CIT vs. Shree Ram Honda Power Equipment upheld the principle of netting off interest before determining business profit. The ITAT also upheld the reasoning of the CIT (Appeals) in this case.

The revenue contended that the source of funds is immaterial in determining the assessability of interest, citing CIT vs. Indian Vaccines Corporation Ltd. However, the assessee argued that the impugned order aligns with the decision in CIT vs. Sasan Power Ltd., where interest earned on money received as share capital was considered a capital receipt. The High Court analyzed the facts and held that the interest received was inextricably linked with the construction of the power project, as the loan was utilized for the expansion. The margin money, from which the interest was earned, was placed to obtain the loan for the expansion project, falling within the ruling of CIT vs. Bokaro Steels Ltd. The Court concluded that the Tribunal's approach and finding were sound, dismissing the appeal.

In conclusion, the judgment clarifies that interest earned by the assessee on margin money deposited for borrowing to finance its expansion project is considered capital in nature and not liable to tax. The decision is based on established legal principles and precedents, emphasizing the link between the interest earned and the purpose of the loan for the expansion project.