2017 (9) TMI 1806 - AT - Income Tax

Accrual of income - Interest earned on the contracts advances by the assessee during the construction period - disallowance of capitalization of interest - Treated as Income from other sources - Held that - In view of the assessee s own case 2016 (3) TMI 49 - ITAT DELHI since the work of construction of the power plant was under progress interest incomes are also inextricably linked with the setting up of the power plant and such incomes have gone on to reduce the expenses for setting up of the plant and as there was no surplus funds available with the appellant company therefore such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum as income from other source u/s 56 - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of interest income amounting to ?2,59,43,153.
2. Determination of whether interest income from contractor advances is inextricably linked with the setting up of the project.
3. Consideration of additional grounds of appeal by the appellant.

Issue-wise Detailed Analysis:

1. Deletion of Interest Income Amounting to ?2,59,43,153:
The primary issue in the appeal was the deletion of the addition made by the Assessing Officer (AO) on account of interest earned on contractor advances during the construction period. The department contended that the interest income should be included in the total income as per Section 5 of the Income Tax Act, which states that the total income includes all income earned or received by a person in the previous year. However, the assessee argued that this issue was already covered in their favor by an earlier order dated 15.02.2016 for the assessment year 2010-11 in ITA No. 6016/Del/2013, where it was decided that such interest income is inextricably linked with the setting up of the project and should be treated as a capital receipt.

2. Determination of Whether Interest Income from Contractor Advances is Inextricably Linked with the Setting Up of the Project:
The Tribunal considered the submissions of both parties and reviewed the material on record. It was noted that an identical issue with similar facts had been decided in favor of the assessee for the assessment year 2010-11. The Tribunal referenced the detailed findings of the CIT(A) in the earlier case, which discussed that the interest earned on advances to contractors and bank deposits was inextricably linked with the construction of the power plant. The CIT(A) had distinguished the case from the Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, where the funds were found to be surplus. In the present case, the funds were not surplus but were temporarily parked to maintain liquidity and reduce construction costs. The Tribunal upheld the CIT(A)'s decision, citing precedents such as CIT v. Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd. v. ITO, which supported the view that such interest income should be treated as a capital receipt.

3. Consideration of Additional Grounds of Appeal by the Appellant:
The appellant sought to add fresh grounds of appeal or amend existing ones. However, the Tribunal did not find merit in the department's appeal and upheld the CIT(A)'s order, dismissing the appeal of the department. The Tribunal's decision was consistent with the earlier judgment for the assessment year 2010-11, which had been affirmed by the Hon’ble Jurisdictional High Court in ITA No. 541/2016.

Conclusion:
The Tribunal dismissed the department's appeals for both assessment years 2011-12 and 2012-13, upholding the CIT(A)'s decision to delete the addition made by the AO on account of interest earned on contractor advances. The interest income was deemed inextricably linked with the setting up of the project and treated as a capital receipt, not liable to tax as income from other sources. The Tribunal's decision was based on precedents and a detailed analysis of the facts and legal positions. The order was pronounced in the court on 13/09/2017.