2019 (3) TMI 1457 - AT - Income Tax

Interest received on FDRs/ICDs with bank/NBFCs - Capital receipt or revenue receipt - unutilized funds which could not be used in the development of the port terminal due to various reasons such as clearances from Govt. Authorities and due to local protests by the public - addition under the normal provisions of the Act as well as u/s 115JB - funds were received as share capital solely for the development of port terminal and other facilities at Karanja Creek and were raised on Landon stock exchange - HELD THAT - We hold that the interest income received by the assessee from the FDRs/ICDs made out of funds are inextricably linked to the development of port terminal and other infrastructure at Karanja Creek which is yet to be completed and commissioned. We would like to add that the these funds could not be used for the development work of the port due to late issuance of permissions/clearances by the Govt authorities and also due to some local issues. Therefore, the interest income is a capital receipt and is not taxable at all both under the normal provisions of the Act as well as u/s 115JB of the Act. The appeal of the assessee is allowed.

Issues Involved:
1. Classification of interest income as capital or revenue receipt.
2. Taxability of interest income under normal provisions and Section 115JB (Minimum Alternate Tax) of the Income Tax Act.
3. Applicability of judicial precedents and binding nature of Tribunal decisions on lower authorities.

Detailed Analysis:

Issue 1: Classification of Interest Income as Capital or Revenue Receipt
The primary issue was whether the interest income of ?44.45 Crores earned by the assessee on Fixed Deposits Receipts (FDRs) and Inter-Corporate Deposits (ICDs) during the period prior to the commencement of the port terminal at Karanja Creek should be treated as a capital receipt or revenue receipt. The assessee argued that the interest income was capital in nature as it was earned on funds that were inextricably linked to the development of the port terminal, which was still under construction and had not commenced operations. The assessee relied on several judicial precedents, including the Supreme Court's decision in CIT v. Bokaro Steel Ltd. (236 ITR 315) and the Delhi High Court's decision in Indian Oil Panipat Power Consortium (315 ITR 255), which held that income earned on funds linked to the setting up of a plant should be capitalized and not treated as income from other sources.

The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the assessee's claim, treating the interest income as revenue receipt taxable under the head "Income from Other Sources." The CIT(A) distinguished the case of Bokaro Steel Ltd. on the grounds that the interest in question was earned on idle funds temporarily invested in fixed deposits, which did not have the same intrinsic connection to the construction activity as the receipts in Bokaro Steel Ltd.

Issue 2: Taxability of Interest Income under Normal Provisions and Section 115JB
The assessee contended that since the interest income was capital in nature, it should not be taxed under the normal provisions of the Income Tax Act or under Section 115JB, which deals with Minimum Alternate Tax (MAT). The assessee cited various judicial precedents to support the argument that capital receipts should not be included in the computation of book profits for MAT purposes. These precedents included decisions from the Supreme Court and various High Courts, such as Indo Rama Synthetics (I) Ltd. v. CIT (330 ITR 363), which emphasized that the object of MAT provisions is to bring out the real profit of the companies and should not include capital receipts.

The AO and CIT(A) disagreed, holding that the interest income should be included in the computation of book profits under Section 115JB, as it was credited to the profit and loss account.

Issue 3: Applicability of Judicial Precedents and Binding Nature of Tribunal Decisions
The assessee argued that the AO and CIT(A) were bound by the decisions of higher judicial authorities, including the Supreme Court and High Courts, as well as the Income Tax Appellate Tribunal (ITAT). The assessee cited the Bombay High Court's decision in ITO v. Siemens India Ltd. (156 ITR 11) and the Supreme Court's decision in Asst. CCB v. Dunlop India Ltd. (154 ITR 172), which emphasized the binding nature of judicial precedents on lower authorities.

The AO and CIT(A) justified their stance by noting that some of the judicial precedents relied upon by the assessee were under appeal or pending disposal in higher courts, and thus, they chose not to follow them.

Tribunal's Judgment:
After considering the arguments and submissions from both parties, the ITAT Mumbai delivered a comprehensive judgment addressing each issue in detail:

1. Classification of Interest Income: The ITAT ruled in favor of the assessee, holding that the interest income earned on FDRs and ICDs was indeed a capital receipt. The Tribunal observed that the funds were raised specifically for the development of the port terminal and were temporarily invested due to delays beyond the control of the assessee. The Tribunal relied on the Supreme Court's decision in Bokaro Steel Ltd. and the Delhi High Court's decision in Indian Oil Panipat Power Consortium, which supported the assessee's claim that such interest income should be capitalized and not treated as revenue receipt.

2. Taxability under Normal Provisions and Section 115JB: The ITAT held that since the interest income was a capital receipt, it should not be taxed under the normal provisions of the Income Tax Act or included in the computation of book profits under Section 115JB. The Tribunal cited various judicial precedents, including Indo Rama Synthetics (I) Ltd. v. CIT, to support the view that capital receipts should not be included in the computation of book profits for MAT purposes.

3. Applicability of Judicial Precedents: The ITAT emphasized the binding nature of judicial precedents on lower authorities, citing the Bombay High Court's decision in ITO v. Siemens India Ltd. and the Supreme Court's decision in Asst. CCB v. Dunlop India Ltd. The Tribunal criticized the AO and CIT(A) for not following binding judicial precedents and held that the decisions of higher judicial authorities must be followed unless they are overturned or suspended by a higher court.

Conclusion:
The ITAT allowed the appeals of the assessee for the assessment years 2013-14, 2014-15, and 2015-16, holding that the interest income was a capital receipt and not taxable under the normal provisions of the Income Tax Act or under Section 115JB. The Tribunal's judgment reinforced the principle that capital receipts should not be taxed and highlighted the importance of adhering to judicial precedents in tax assessments.

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