2019 (6) TMI 1411 - AT - Income Tax

Interest income on margin money deposits - interest income arising from deposits made with the Bank during the pre-commencement period - Capital receipt or income from other sources - whether interest income derived from certain deposits placed with the banks (while the power project construction is under progress and in the process of being set up and has not commenced generating electricity) can be set off against the ongoing power project costs incurred of capital nature and consequently whether such interest income would go to reduce project costs prior to its commencement or not? - HELD THAT - It is primarily the case of the assessee that the interest income derived from margin money deposits is inextricably linked to the project being set up. Hence the interest income is required to be regarded as income of capital nature for the purposes of project. We concur with the view taken by the CIT(A) that interest income so earned on deposits placed with Bank to obtain the bank guarantee have been rightly reduced from the project development expenditure incurred for set up of power plant. We note that identical issue came up for consideration of the co-ordinate bench in the case of M/s. Adani Power Rajasthan Ltd. 2019 (1) TMI 1132 - ITAT AHMEDABAD in a similarly placed situation. We find that the CIT(A) has rightly applied the law laid down by the Hon ble Supreme Court in Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT It is a case where the fixed deposits giving rise to the interest income has been placed as margin money with the State Bank of India for obtaining bank guarantee for the purposes of the project in progress and consequently the fixed deposits are integrally connected with the setting up the power plant. The interest income therefore is not independent of the costs incurred for power project. Hence we find ourselves in complete agreement with the action of the CIT(A) in upholding the action of the assessee to reduce interest income arising from deposits placed with banks out of the costs of project in progress and in reversing the action of the AO in treating the same as revenue de hors the development of the project. The grievance of the Revenue is bereft of any merit. CIT(A) has rightly allowed the deduction of interest expenditure incurred for development of project (forming part of costs of project) against the interest receipts derived from margin money deposits. We do not see any error in the conclusion of the CIT(A) on this score.

Summary

Issues Involved:

1. Taxability of interest income on margin money deposits.
2. Classification of interest income as 'Business Income' or 'Income from Other Sources'.
3. Allowance of corresponding interest expenditure against interest receipts.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income on Margin Money Deposits:

The core issue is whether the interest income derived from margin money deposits, placed with banks for obtaining bank guarantees and letters of credit necessary for the procurement of equipment and materials for setting up a power plant, should be treated as capital receipts that reduce the capital cost or as income taxable under the head 'Income from Other Sources'.

The assessee, engaged in the business of power generation, argued that the interest income of Rs. 1,05,14,115/- earned on such deposits during the pre-commencement period should be capitalized and reduce the cost of the project. The Assessing Officer (AO) disagreed, citing the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest income earned on short-term deposits before the commencement of business is taxable as 'Income from Other Sources'.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the AO's decision, relying on the Supreme Court's rulings in CIT vs. Bokaro Steel Ltd. and CIT vs. Karnal Cooperative Sugar Mills Ltd., which distinguished between interest earned on idle funds and interest earned on deposits directly linked to the acquisition of assets for setting up a plant. The CIT(A) held that the interest income in this case was inextricably linked to the project and should be treated as a capital receipt, reducing the project's cost.

2. Classification of Interest Income as 'Business Income' or 'Income from Other Sources':

The AO classified the interest income as 'Income from Other Sources', while the CIT(A) treated it as a capital receipt linked to the project. The Tribunal agreed with the CIT(A), emphasizing that the interest income was derived from deposits made to obtain bank guarantees essential for the project, thus integrally connected with the setting up of the power plant. The Tribunal noted that the case was distinguishable from Tuticorin Alkali Chemicals & Fertilizers Ltd., as the deposits were not made to park idle funds but were a mandatory requirement for the project.

3. Allowance of Corresponding Interest Expenditure Against Interest Receipts:

The AO's decision to treat the interest income as 'Income from Other Sources' led to the disallowance of corresponding interest expenditure. The CIT(A), however, allowed the deduction of interest expenditure incurred for the project's development against the interest receipts, considering them part of the project's cost. The Tribunal upheld this view, finding no error in the CIT(A)'s conclusion.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision that the interest income from margin money deposits, being inextricably linked with the project, should be treated as a capital receipt reducing the project's cost. The Tribunal also upheld the allowance of corresponding interest expenditure against the interest receipts.

Result:

All three Revenue's appeals were dismissed.