2018 (2) TMI 1763 - AT - Income Tax

Interest income from banks on FD - capitalization of interest amount in pre-operative expenses - It was observed that the interest earned was deducted from capital work in progress since the project is under construction and there was no income from operations. The surplus money was deposited in short-term deposits with bank. - AO treated the interest income as income from other sources - Held that - the interest earned from temporary deposits are inextricably linked with the construction of plant and manufacturing unit. Accordingly we delete the addition made by Ld. AO in respect of the interest as income from other sources and hold the same as income from business to be adjusted against capital work-inprogress. - Decided in favor of assessee.

Summary

Issues Involved:
1. Applicability of Supreme Court decisions on interest earned during the setup period of the industry.
2. Correctness of the interest figure considered by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Applicability of Supreme Court Decisions on Interest Earned:

The appellant challenged the application of the Supreme Court's decision in Tuticorin Alkalies & Fertilizers Ltd. 227 ITR 172 by the CIT(A), arguing that the decisions in CIT vs. Bokaro Steels Ltd. 236 ITR 315 and Bongaigaon Refinery & Petrochemicals Ltd. 251 ITR 329, followed by the Delhi High Court, should apply instead.

The assessee filed its return declaring 'nil' income, which was processed, and the case was selected for scrutiny. The AO observed that the assessee earned interest income from banks on fixed deposits (FDs) and capitalized ?20,05,96,284/- in pre-operative expenses. The AO disallowed this interest, treating it as income from other sources, except for ?26.35 lakh earned on bank guarantees, which was allowed as business income.

The assessee contended that the interest earned from deposits, which were linked to capital work in progress, should be treated as capital receipts and set off against pre-operative expenses. The assessee relied on the Delhi High Court's decision in Indian Oil Power Consortium Ltd vs. ITO, which held that interest earned on funds temporarily parked, intended for business purposes, should be treated as capital receipts.

The Tribunal agreed with the assessee, distinguishing the present case from the CIT vs. Madhya Bharat Energy Corporation Ltd, where the interest earned on FDRs was treated as income from other sources. The Tribunal noted that the funds were inextricably linked to the setting up of the plant and machinery, following the principles laid down in Bokaro Steel Ltd. and Indian Oil Power Consortium Ltd. Therefore, the interest earned was considered a capital receipt, to be set off against pre-operative expenses.

2. Correctness of the Interest Figure Considered by the AO:

The second issue was regarding the correctness of the interest figure considered by the AO. The assessee argued that the AO incorrectly included interest pertaining to the assessment year 2012-13 in the current year's interest figure.

Since the Tribunal allowed the interest earned as inextricably linked with the business activity of the assessee, the entire addition was deleted. Consequently, the Tribunal found it unnecessary to direct the AO to correct the interest figure, rendering this ground infructuous.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, holding that the interest earned from temporary deposits was inextricably linked with the construction of the plant and manufacturing unit. The interest was treated as income from business, to be adjusted against capital work-in-progress, and not as income from other sources. The appeal was pronounced in the open court on 07.02.2018.