2017 (10) TMI 680 - AT - Income Tax

Interest earned on fixed deposit - whether to be treated as capital receipt, hence, not taxable? - assessee claimed such interest as capital receipt and set it off against pre operative expenditure - Assessing Officer assessed the interest as income from other sources - Commissioner (Appeals) having found that interest earned was inextricably linked with the setting up of the power plant allowed the claim of the assessee - Held that - Undisputedly, in case of assessee, the funds invested temporarily in the fixed deposit were for the purpose of setting up of the power project. Therefore, the interest earned is inextricably linked with the power project. The other decisions relied upon by the learned Sr. Counsel including the decision in case of CIT v/s Karnal Co operative Sugar Mills Ltd. (1999 (4) TMI 7 - SUPREME Court) express similar view. That being the case we hold that the interest earned on fixed deposit is capital receipt and has to be set off against pre operatives expenditure thereby will go to reduce the cost of CWIP. Ground raised by assessee is allowed.

Summary

Issues:
Whether interest earned on fixed deposit is to be treated as a capital receipt and not taxable?

Analysis:
The appeal concerned the treatment of interest earned on a fixed deposit by a domestic company, wholly owned subsidiary of another entity, engaged in setting up a solar power plant project. The Assessing Officer reduced the interest amount from the capital work-in-progress, considering it taxable income. The assessee argued that the interest, linked to the project's setup, should be treated as a capital receipt. The Commissioner (Appeals) upheld the addition, stating that interest income is not a business activity. The Sr. Counsel for the assessee contended that the interest was earned to meet the net worth criteria for the project bid, hence a capital receipt. The Tribunal analyzed the facts, emphasizing the fund infusion by the parent company for the project's qualification requirements. It noted the temporary investment of funds in a fixed deposit before the project's initiation. The Tribunal differentiated the case from Tuticorin Alkali Chemicals, where surplus borrowed funds were invested, and held that interest linked to project setup is a capital receipt, reducing the project's cost.

The Departmental Representative argued that the interest income should be taxed as other sources based on previous decisions. The Tribunal observed the direct connection between the fixed deposit interest and the project setup, unlike the Tuticorin case. It referenced the Supreme Court's decision in Bokaro Steels Ltd., emphasizing that receipts linked to asset creation reduce costs and are capital in nature. The Tribunal cited the Indian Oil Panipat Power Consortium Ltd. case, where interest linked to the project was treated as a capital receipt. Relying on these precedents, the Tribunal allowed the assessee's claim, stating that the interest earned on the fixed deposit was a capital receipt to be set off against pre-operative expenditure, reducing the capital work-in-progress cost. Consequently, the Tribunal allowed the appeal, emphasizing the nexus between the interest income and the project setup, in line with established legal principles.

In conclusion, the Tribunal held that the interest earned on the fixed deposit was a capital receipt linked to the solar power project's setup, following established legal precedents. The Tribunal allowed the appeal, setting aside the previous decisions and reducing the capital work-in-progress cost by the interest income earned.