2017 (11) TMI 1776 - AT - Income Tax

Treatment to interest income - correct head of income - capital receipt or income from other sources - HELD THAT - The funds deposited by the assessee with the banks are out of the equity capital of the assessee and not surplus funds and they were deposited in the bank because the assessee was not in a position to proceed with the implementation of the project due to various bottlenecks beyond the control of the assessee. It is also to be noticed that the assessee was not paying any interest on such funds as it is its share capital which is meant were setting up of the project only. Such deposits are in our opinion inextricably linked with the project and are part of capital work-in-progress. The Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. 2009 (2) TMI 32 - DELHI HIGH COURT and in the case of CIT Vs. Facor Power Ltd. 2016 (1) TMI 461 - DELHI HIGH COURT have reiterated the principle laid down in the case of Bokaro Steel Ltd. (supra) to hold that the interest earned on funds primarily bought for infusion in the business could not be classified as income from other sources . We find that CIT(A) has followed these decisions for granting relief to the assessee. Therefore we see no reason to interfere with the order of the CIT(A) on this issue. - decided against revenue

Summary

Issues:
- Treatment of interest income as capital receipt
- Taxability of interest income earned during pre-commencement period
- Interpretation of relevant legal precedents

Issue 1: Treatment of interest income as capital receipt
The Revenue contended that the interest income earned during the pre-commencement period should be considered as a capital receipt. The CIT(A) supported this argument by referring to various judgments, including those of the Hon'ble Supreme Court. The Revenue's appeal was based on the disagreement with the relief granted by the CIT(A) in treating the interest income from fixed deposits of equity funds as a capital receipt reducing project cost. The Tribunal analyzed the facts, distinguishing them from previous cases, and agreed with the CIT(A)'s decision. The Tribunal emphasized that the interest income was inextricably linked with the project and part of capital work-in-progress, following the principles laid down in relevant legal precedents.

Issue 2: Taxability of interest income earned during pre-commencement period
The A.O. had assessed the entire interest income under the head "income from other sources" for all the assessees. The assessee argued that the interest income earned on deposits during the pre-production period should be treated as a capital receipt and reduced from the project cost. The A.O., however, did not accept this argument and brought the interest income to tax for all the assessees. The CIT(A) granted relief to the assessee, considering various legal judgments and holding the interest income as a capital receipt reducing project cost. The Tribunal upheld the CIT(A)'s decision, emphasizing the specific circumstances of the case and the inextricable link between the interest income and the project.

Issue 3: Interpretation of relevant legal precedents
The Tribunal extensively discussed and interpreted various legal precedents cited by both the Revenue and the assessee. It analyzed decisions of the Hon'ble Supreme Court and High Courts regarding the treatment of interest income in cases where it is linked to the capital structure of the assessee company. The Tribunal highlighted the distinction between cases where interest income is directly connected with the project or construction activities and cases where it is not. It emphasized the principle that interest income earned on funds primarily bought for business infusion should not be classified as "income from other sources." The Tribunal found that the CIT(A) correctly applied these legal principles in granting relief to the assessee, leading to the dismissal of all appeals filed by the Revenue.