2018 (5) TMI 1868 - AT - Income Tax

Interest income earned during the construction period on bank deposits made out of share application money received - taxable as Income from other sources or reduce the capital cost of the plant which is being set up by the assessee-company - Held that - As decided in BANK NOTE PAPER MILL INDIA P. LTD. 2017 (8) TMI 168 - ITAT BANGALORE Interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax as the interest is earned on capital account. No reason to differ with decision rendered by the coordinate bench of this Tribunal (supra) in assessee s own case for earlier assessment years the fact that whether the deposits are short term or long term has no bearing on the issue as the issue is required to be adjudicated having regard to the object of placing the deposits. The coordinate bench has decided this issue in favour of the assessee company having regard to the objects behind placing the deposits the decision does not call for any interference. Accordingly the appeals filed by the assessee are allowed.

Summary

Issues Involved:
1. Taxability of interest income earned during the construction period.
2. Classification of interest income as 'income from other sources' or as a reduction of the capital cost of the project.

Detailed Analysis:

Taxability of Interest Income Earned During the Construction Period:
The primary issue in this case is whether the interest income earned by the assessee company during the construction period on bank deposits made from share capital received should be taxable as 'income from other sources' or should reduce the capital cost of the project. The assessee, a joint venture between Bharatiya Reserve Bank Note Mudran Private Limited and Security Printing and Minting Corporation of India Ltd., was in the process of setting up a plant for manufacturing currency paper. The funds received from the Government of India and the Reserve Bank of India, which were not immediately required, were deposited in a bank, resulting in an interest income of ?21,52,81,724. The assessee reduced this interest income from the pre-operative expenses on the construction of the plant and did not offer it for tax.

Classification of Interest Income:
The Assessing Officer (AO) did not accept the assessee's stand and relied on the Supreme Court's decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT to classify the interest income as 'income from other sources' and brought it to tax. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading the assessee to file an appeal before the Tribunal.

The Tribunal noted that the issue was already covered by its own decision in the assessee's case for the Assessment Year 2011-12. In that case, it was held that the interest income earned during the construction period on bank deposits made from share application money should reduce the capital cost of the project and not be treated as revenue receipt. The Tribunal distinguished the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., stating that it did not apply when the interest receipt was directly connected with or incidental to the construction of the plant.

The Tribunal also referred to the Supreme Court's decision in Bokaro Steel Ltd., which held that interest income earned during the construction period should reduce the capital cost of the project. This principle was further supported by the Karnataka High Court in the case of CIT vs. Karnataka State Agricultural Produce Processing and Export Corporation Ltd., where it was held that interest earned on deposits temporarily kept out of grants received from the State Government should reduce the capital cost of the project and not be brought to tax.

Conclusion:
Respectfully following the decisions in the above cases, the Tribunal held that the interest income earned by the assessee should reduce the capital cost of the project and should not be brought to tax. The Tribunal found no reason to differ from its earlier decision in the assessee's own case and allowed the appeals filed by the assessee.

Final Judgment:
The appeals of the assessee were allowed, and the interest income was held to reduce the capital cost of the project and not be taxable as 'income from other sources'. The order was pronounced in the open court on the 23rd day of May, 2018.