2016 (2) TMI 349 - AT - Income Tax

Interest income - treated as income from other sources or capital gain - Held that - The Delhi High Court, after considering decision in the case of Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT( 2001 (7) TMI 4 - SUPREME Court ), in the case of CIT v. Jaypee DSC Ventures Ltd. (2011 (3) TMI 309 - Delhi High Court ), observed that the interest earned by the assessee on the fixed deposit made for performance guarantee of contract was capital in nature and cannot be assessed as income from other sources. Similarly, the Tribunal on another occasion in assessee s case, has taken the same view. Considering the facts and circumstances of the case, we are of the opinion that the deposit made by the assessee had an inextricable nexus with the implementation of the power project. - Decided in favour of assessee.

Summary

Issues:
Appeal against CIT(A) order confirming treatment of interest income as income from other sources for assessment years 2005-06 and 2006-07.

Analysis:
The appeals by the assessee challenged the CIT(A) order confirming the Assessing Officer's treatment of interest income as income from other sources for the assessment years 2005-06 and 2006-07. The Assessing Officer assessed the interest income for the year 2005-06 as the assessee failed to provide details and evidence during the assessment proceedings. For the year 2006-07, the AO considered the interest income as income from other sources, despite the assessee adjusting it against pre-operative expenses. The assessee relied on a Tribunal order from a previous year, which was not accepted by the AO. The CIT(A) dismissed the appeal, citing a Supreme Court judgment and overlooking the Tribunal's earlier decision in favor of the assessee. The Tribunal noted that the interest earned had a direct connection with the implementation of a power project, following previous decisions that similar interest income was capital in nature and not assessable as income from other sources.

The Department argued that a Supreme Court decision stated that interest income received before commencement cannot be adjusted against project cost. However, the Tribunal referred to a Delhi High Court case and another Tribunal decision in the assessee's case, both supporting the capital nature of interest earned on fixed deposits for performance guarantees. The Tribunal found a direct link between the deposit made by the assessee and the power project implementation, leading to the allowance of the assessee's appeal. Consequently, the Tribunal allowed the appeals of the assessee, overturning the CIT(A) order and deciding in favor of the assessee.