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2018 (4) TMI 1853 - AT - Income TaxCorrect head of income - interest income on FDRs for short term duration - income from other sources or capital receipt - HELD THAT - Respectfully applying the ratio of the judgment of Indian Oil Panipat Power Consortium Ltd. 2009 (2) TMI 32 - DELHI HIGH COURT we hold that since the business of the assessee had not commenced, the interest received in the period prior to the commencement of business was in the nature of capital receipt and was required to be set off against the preoperative expenses. Therefore, the impugned interest income is a capital receipt not chargeable to tax during the year under consideration. Accordingly, we allow the grounds of appeal raised by the assessee.
Issues Involved:
1. Whether the interest income on FDRs should be treated as income from other sources or as a capital receipt. Issue-Wise Detailed Analysis: 1. Treatment of Interest Income on FDRs: The sole issue under dispute was the addition of ? 3,40,52,432/- pertaining to interest income on FDRs for short-term duration. The Assessing Officer treated this interest income as income from other sources, whereas the assessee claimed it as a capital receipt. The assessee, a limited company incorporated as a joint venture between Jaiprakash Power Ventures Ltd. and Power Grid Corporation of India Ltd., aimed to set up a power transmission system in Himachal Pradesh. During the project period, funds not immediately required were parked in fixed deposit receipts (FDRs). The interest income earned on these FDRs was credited to the Incidental Expenditure During Construction Pending Allocation account and claimed as exempt being a capital receipt. The Assessing Officer, however, taxed this interest income as income from other sources. On appeal, the Ld. Commissioner of Income Tax (Appeals) confirmed the addition, relying on the Supreme Court's judgment in Tuticorin Chemicals and Fertilizers Ltd. (227 ITR 172). The assessee argued that the funds placed in FDRs were not surplus but were inextricably linked with the project, and thus, the interest earned should be treated as a capital receipt. The assessee relied on the Supreme Court's judgment in Bokaro Steel Ltd. (236 ITR 315) and the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. (315 ITR 255). The ITAT noted that the issue had been addressed in similar cases, such as Adani Power Ltd. vs. ACIT, where the ITAT Ahmedabad Bench analyzed the judgments in Tuticorin Chemicals and Fertilizers Ltd. and Bokaro Steel Ltd., along with other related judgments. The ITAT concluded that interest earned on funds inextricably linked to the setting up of a project should be treated as a capital receipt and set off against pre-operative expenses. The ITAT further noted that the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. held that interest earned on funds raised for share capital, temporarily put in fixed deposit awaiting acquisition of land, could not be classified as income from other sources. Instead, it was a capital receipt to be set off against pre-operative expenses. The ITAT concluded that the interest income in the present case was a capital receipt not chargeable to tax during the year under consideration. The grounds of appeal raised by the assessee were allowed, and the interest income was required to be set off against pre-operative expenses. Conclusion: The ITAT ruled in favor of the assessee, holding that the interest income on FDRs was a capital receipt and not chargeable to tax during the year under consideration. The appeal of the assessee was allowed. The order was pronounced in the Open Court on 24th July 2018.
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