2018 (6) TMI 1672 - AT - Income Tax

Interest on margin money kept for obtaining bank guarantee for credit for power business as business income - Characterization of income - HELD THAT - We find that the assessee was setting up a thermal power plant that during the year under appeal the project of construction of the power plant was under progress and no commercial activities whatsoever had begun that all the major expenses incurred in relation to the project were capitalised under 'capital work in progress that during the year under appeal the assessee had earned interest income out of the funds augmented for issuing bank guarantee to various parties in connection with the construction of the power projects as well as for meeting the various expenses for purchase of various assets required in the construction of the power plant, that the same was treated as capital asset by the assessee that it was accordingly reduced from the capital work in progress and was claimed as business income. In our opinion in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant the interest incurred before the commencement of production on such borrowed money has to be capitalised and has to be added to the cost of the fixed assets created as a result of such expenditure. Similarly if the assessee receives any amount which is inextricably linked with the process of setting up its plant and machinery such receipts will go to reduce the cost of its assets. We also hold that treatment of the receipts depends on the purpose for which the funds are utilised. The use of funds decides the characterisation of the amount. In the case under consideration that the interest receipt was directly linked to setting up of business apparatus of the assessee. It was not idle money that was invested or parked for earning interest. We have perused the clause 2.4 of Significant Accounting Policies as appearing in Schedule XI and are of the opinion that the interest income earned by the assessee had direct and intimate connection with its business. Setting of power plants takes time and the assessee has to make investment with banks for availing various facilities. FAA had rightly held that in the case of interest receipts on margin deposits kept with the banks for the purpose of getting the Credit Facilities which were required for the construction of the plant it was to be allowed to be reduced from the cost of the plant and was to be held as not taxable. So confirming her order we hold that her order does not suffer from any factual or legal infirmity. Effective ground of appeal is decided against the AO.

Summary

Issues involved:
1. Tax treatment of interest income on margin money for obtaining bank guarantee for credit for power business.

Detailed Analysis:

Issue 1: Tax treatment of interest income on margin money for obtaining bank guarantee for credit for power business

The Appellate Tribunal ITAT Mumbai considered the appeal challenging the orders of the CIT(A)-12 regarding the tax treatment of interest income on margin money for obtaining bank guarantee for credit for power business. The AO treated the interest amount of ?3.33 crores on margin money as business income. The AO argued that the interest income received on margin money should be taxed under the head 'Income From Other Sources'. However, the assessee contended that the interest income was inextricably linked to the setting up of the power plant and should be capitalized and reduced from the balance of 'Capital Work in Progress'. The FAA supported the assessee's position, emphasizing that the interest income was derived from fixed deposits placed with the bank for availing credit facilities necessary for the construction of the power plant.

During the proceedings, the Departmental Representative (DR) supported the AO's order, while the Authorized Representative (AR) highlighted that the interest income earned was incidental and interlinked with the business activities of the assessee. The Tribunal observed that the interest income earned by the assessee was directly linked to the process of setting up the business apparatus and had an intimate connection with its business operations. Referring to relevant case laws, the Tribunal held that interest receipts linked to the setting up of the plant and machinery should be treated as capital receipts and not taxable under 'Income From Other Sources'.

In conclusion, the Tribunal endorsed the FAA's decision, ruling that interest receipts on margin deposits for obtaining credit facilities for the construction of the power plant were to be reduced from the cost of the plant and not considered taxable income. The appeals filed by the AO for both assessment years were dismissed based on the similarity of facts and grounds of appeal.

In summary, the judgment clarified the tax treatment of interest income on margin money for obtaining bank guarantee for credit for a power business, emphasizing the capitalization of such income as it was directly linked to the process of setting up the business apparatus. The decision underscored the importance of considering the purpose for which funds are utilized in determining the character of receipts and upheld the FAA's ruling in favor of the assessee.