2009 (7) TMI 4 - HC - Income Tax

Deduction u/s 57(iii) Natutre of amount received from employees and oustees as capital receipts - the deductions to the extent of 2.5% towards administrative costs on the interest income on short term deposits allowed - the interest and rent received from its employees and oustees in Dam area had a nature of capital receipts as the construction process was still on and the respondent-assessee had yet not started the business activity.

Summary

Issues:
1. Whether ITAT erred in deleting addition of 2.5% on interest income claimed as deduction under Section 57(iii) of the Income Tax Act, 1961?
2. Whether CIT(A) and ITAT erred in accepting rent and interest received from employees and oustees in Dam area as capital receipts, excluding them from taxability?

Analysis:
Issue 1:
The appeals involved common questions of law regarding the treatment of interest income by the respondent-assessee, Tehri Hydro Development Corporation (THDC). The company, engaged in a construction project, claimed deductions on interest earned and rent received. The Assessing Officer disallowed these deductions, leading to appeals. The CIT(A) allowed the deductions, which the Revenue challenged before ITAT. The ITAT dismissed the Revenue's appeal and allowed deductions of administrative expenditure on interest income. The Apex court precedent in Tuticorin Alkali Chemicals and Fertilizers Ltd. case established that interest income is generally revenue in nature unless received as damages or compensation. The court also noted that the nature of receipts as capital or revenue depends on the stage of business activities, which was construction in this case.

Issue 2:
The judgment referred to Commissioner of Income Tax Vs. Bokaro Steel Ltd. case, where the Apex court held that certain receipts could be treated as capital receipts if they were directly connected to construction activities and reduced the cost of construction. The court emphasized that these receipts were not income from an independent source but were integral to the construction process. Applying this principle, the ITAT's decision to treat interest and rent received by THDC as capital receipts was upheld. The court found no error in allowing deductions towards administrative costs and confirming the nature of receipts as capital due to the ongoing construction phase and absence of business activities by the respondent-assessee.

The High Court dismissed all three appeals, upholding the ITAT's decision and finding no error in the treatment of interest income and rent as capital receipts.