2017 (8) TMI 1626 - AT - Income Tax

Characterization of income - interest Receipt during construction period - income from other sources or capital receipt - HELD THAT - In the present case, the interest was not earned on the surplus funds but were equity contribution by the joint venture of partners for acquisition, construction and setting up of a plant and other infrastructure facilities. The funds kept in the current account of the company were used for on-going construction activity as and when required. In the present case, the funds were never invested or deposited in any long term deposit instrument but automatically transferred by the bank in short term MODs Accounts in accordance with the account terms and conditions. The said MODs were reversed automatically as and when the assessee withdrew the amounts from account. There was no intention to earn any interest on such funds. The funds were kept in liquid so as to use them as and when required, since, the interest on short term MODs were inextricably link to the construction and acquisition activities in the regular courses of the assessee s activities. The interest was not earned out of the surplus funds so to treat the said income as income from other source is not justified. This claim of the assessee sustains because the equity contribution by the Joint Venture partners cannot be termed as surplus funds because it was having a short term MODs as per the requirement of day to day construction activities of the assessee - Decided in favour of assessee.

Summary

Issues:
- Treatment of interest received during construction period as income from other sources instead of capital receipt

Analysis:
1. The appeals were filed against the orders passed by CIT(A)-Allahabad confirming the addition of interest received during the construction period as income from other sources. The grounds of appeal for the Assessment Year 2009-10 highlighted that the interest received was linked to plant set-up activities and should be considered a capital receipt, not revenue income. The company had not commenced any business activities and the funds received were solely for setting up the plant, which was being utilized accordingly. The Assessing Officer treated the interest received as revenue income under section 143(3) of the Income Tax Act.

2. For the Assessment Year 2010-11, a similar treatment was given by the Assessing Officer to the interest received, considering it as income from other sources. The company contended that the funds were not borrowed but equity contributions for plant establishment, and thus, should be treated as capital receipts, not taxable income.

3. The CIT(A) upheld the Assessing Officer's order, stating that the interest earned on the funds was not directly linked to the construction and acquisition activities. The appellant's reliance on the decision of the Hon'ble Supreme Court in CIT Vs. Bokaro Steel Ltd. was considered but found insufficient to establish the link between the interest earned and the plant infrastructure. The CIT(A) also emphasized that until the business activities commenced, income from various sources could be taxable, including interest earned on surplus funds.

4. The appellant argued that the interest income should be set off against pre-operative expenses, citing relevant judgments such as the case of Adani Power Ltd Vs. ACIT and the judgment of Allahabad High Court in CIT Vs. Indo-Gulf Fertilizers & Chemicals. The appellant contended that the interest income was related to specific purposes like setting up power plants and should not be considered income from other sources.

5. The Tribunal concluded that the interest earned was not from surplus funds but equity contributions for plant establishment, which were used for ongoing construction activities. The funds were kept liquid for operational needs, and the interest earned was inextricably linked to construction and acquisition activities. The Tribunal found that the Assessing Officer and CIT(A) overlooked these aspects and wrongly categorized the interest income as revenue instead of capital receipt. Therefore, the appeals of the assessee were allowed for both Assessment Years 2009-10 and 2010-11.