2019 (8) TMI 551 - AT - Income Tax

Interest earned on fixed deposit - interest was set-off against pre-operatives expenditure thereby will go to reduce the cost of CWIP? - notice issued based on AIR information - HELD THAT - Issue squarely covered by decision of SOLARFIELD ENERGY TWO PVT. LTD. VERSUS ITO 2017 (10) TMI 680 - ITAT MUMBAI wherein held that 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 is allowed in favour of assessee. Accrual of income - Testing period revenue - income generated during trial run - income received by the assessee before the commencement of business will reduced from WIP or taxable as income from other sources - HELD THAT - Being consistent with the earlier view taken by the co-ordinate benches of the Tribunal, we are of the view that the income generated during trial run does not arise as the commercial operation of the assessee was not started during the period of trial, thus, the ground of appeal raised by the assessee is allowed.

Issues Involved:
1. Taxability of interest on fixed deposits reduced from capital-work-in-progress.
2. Taxability of testing period revenue reduced from capital-work-in-progress.

Issue-wise Detailed Analysis:

1. Taxability of Interest on Fixed Deposits Reduced from Capital-Work-in-Progress:

The first issue pertains to the addition of interest on fixed deposits reduced from capital-work-in-progress. The assessee argued that the interest earned on fixed deposits should be considered a capital receipt and not taxable. This position was supported by a previous decision of the Tribunal in the case of Solarfield Energy Two Pvt Ltd, which was not appealed by the revenue to the Bombay High Court.

The Tribunal, after reviewing the facts and submissions, noted that the funds temporarily parked in fixed deposits were integrally connected with the setting-up of the power project. Referring to the Hon'ble Supreme Court's judgment in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT, the Tribunal observed that the interest earned had an immediate and proximate nexus with the setting-up of the power project. The Tribunal also referenced the Supreme Court's decision in Bokaro Steels Ltd, which held that any amounts received that are inextricably linked with the process of setting up plant and machinery should be considered capital receipts, reducing the cost of assets.

The Tribunal concluded that the interest earned on fixed deposits was a capital receipt and should be set-off against pre-operative expenditure, thereby reducing the cost of capital work-in-progress. Consequently, the ground raised by the assessee was allowed.

2. Taxability of Testing Period Revenue Reduced from Capital-Work-in-Progress:

The second issue involved the taxability of testing period revenue reduced from capital-work-in-progress. The assessee contended that the revenue earned during the testing period was a capital receipt and correctly deducted from capital-work-in-progress. The Tribunal reviewed the facts and noted that the testing was a precondition before the commencement of commercial operations, and the plant was not capitalized until after the testing period.

The Tribunal referred to several decisions, including those of the coordinate benches in Eco Axis Systems Pvt Ltd, A.D. Hydro Power Ltd, and Gujarat State Fertilizers & Chemicals Ltd, which supported the view that income earned during the trial run should be considered a capital receipt and used to reduce the cost of capital work-in-progress. The Tribunal emphasized that the income generated during the trial run was connected with the business of setting up the plant and should not be treated as income from other sources.

The Tribunal concluded that the income generated during the trial run should be adjusted against pre-operative expenses, consistent with the earlier decisions. Therefore, the ground raised by the assessee was allowed.

Additional Appeal under Section 154:

The assessee also filed an appeal against the order under section 154, contending that the additions made on account of interest income and unbilled revenue were covered by the Supreme Court's decision in Bokaro Steel Ltd. Given that the main appeal (ITA No. 5189/Mum/2016) was allowed, the Tribunal deemed the grounds of the appeal under section 154 as academic and treated the appeal as allowed.

Conclusion:

The Tribunal allowed both appeals filed by the assessee, holding that the interest on fixed deposits and the testing period revenue were capital receipts and should be used to reduce the cost of capital work-in-progress. The decisions were consistent with previous judgments and applicable legal principles.

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