2017 (9) TMI 1930 - AT - Income Tax

Addition of interest income earned on the deposits by the assessee during the construction period - whether total income of a person includes all the income earned (received) or deemed to be earned (received) by the person in the previous year? - CIT-A deleted the addition - HELD THAT - It is noticed that an identical issue having similar facts was a subject matter of the departmental appeal for the assessment year 2010-11 in NTPC Tamil Nadu Energy Co. Ltd., New Delhi 2016 (3) TMI 49 - ITAT DELHI wherein held interest incomes are also inextricably linked with the setting up of the power plant and such incomes have gone on to reduce the expenses for setting up of the plant and as there was no surplus funds available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum as income from other source u/s 56 - Decided in favour of assessee

Summary

Issues Involved:

1. Deletion of interest income by the CIT(A) during the construction period.
2. Classification of interest income as capital receipts or income from other sources.
3. Applicability of the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.
4. Relevance of the Supreme Court decision in CIT v. Bokaro Steel Ltd.
5. Admissibility of interest on funds temporarily parked in banks as capital receipts.
6. Application of Delhi High Court rulings in Indian Oil Panipat Power Consortium Ltd. v. ITO and NTPC Sail Power Company (P) Ltd. v. CIT.

Detailed Analysis:

1. Deletion of Interest Income by the CIT(A) During the Construction Period:

The department's grievance related to the deletion of the addition made by the AO on account of interest earned on deposits during the construction period. The CIT(A) had deleted the interest income of ?2,82,05,091/- and ?78,28,794/- by holding that it would not affect the net profit since the interest income on bank deposits is a capital receipt.

2. Classification of Interest Income as Capital Receipts or Income from Other Sources:

The CIT(A) classified the interest income earned on short-term deposits and advances to contractors as capital receipts, which were adjusted against the expenditure during construction. The AO had treated these receipts as chargeable to tax under section 56 of the Income Tax Act as 'Income from other sources,' following the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.

3. Applicability of the Supreme Court Decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT:

The CIT(A) distinguished the facts of the current case from the Tuticorin Alkali Chemicals case, stating that in the latter, the funds were surplus and the company was ready to commence trial production. In the present case, the funds were not surplus but were temporarily parked to maintain liquidity and reduce construction costs, and thus, the interest income was inextricably linked to the setting up of the project.

4. Relevance of the Supreme Court Decision in CIT v. Bokaro Steel Ltd.:

The CIT(A) relied on the Supreme Court decision in CIT v. Bokaro Steel Ltd., where it was held that interest from advances to contractors and other similar receipts, which are inextricably linked to the setting up of the project, are capital receipts and not income from any independent source. This decision was applied to classify the interest income as capital receipts, reducing the cost of construction.

5. Admissibility of Interest on Funds Temporarily Parked in Banks as Capital Receipts:

The CIT(A) and the ITAT held that the interest earned on funds temporarily parked in banks was inextricably linked with the construction of the power plant and was thus a capital receipt. This was supported by the Delhi High Court's ruling in Indian Oil Panipat Power Consortium Ltd. v. ITO, which held that interest earned on funds awaiting acquisition of land is a capital receipt if it is inextricably linked with the setting up of the project.

6. Application of Delhi High Court Rulings in Indian Oil Panipat Power Consortium Ltd. v. ITO and NTPC Sail Power Company (P) Ltd. v. CIT:

The ITAT applied the Delhi High Court rulings in Indian Oil Panipat Power Consortium Ltd. v. ITO and NTPC Sail Power Company (P) Ltd. v. CIT, which held that interest earned on funds temporarily parked in fixed deposits, if inextricably linked with the setting up of the project, is a capital receipt. This supported the CIT(A)'s decision to delete the addition made by the AO.

Conclusion:

The ITAT upheld the CIT(A)'s decision to classify the interest income as capital receipts and not as income from other sources. The appeals of the department were dismissed, affirming that the interest income earned during the construction period was inextricably linked with the setting up of the project and thus should be treated as capital receipts. The ITAT's decision was consistent with the precedents set by the Supreme Court and the Delhi High Court.