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2021 (2) TMI 171 - AT - Income TaxCorrect head of income - Income from FDRs during pre-operative period - Income from other sources OR capital gain - HELD THAT - Considering the above facts in the light of the Order of the Tribunal 2018 (4) TMI 1853 - ITAT DELHI in the case of the same assessee, we find the issue is covered in favour of the assessee as held since the business of the assessee had not commenced, the interest received in the period prior to the commencement of business was in the nature of capital receipt and was required to be set off against the preoperative expenses. Therefore, the impugned interest income is a capital receipt not chargeable to tax during the year under consideration. We, accordingly, following the same reasons for decision, set aside the Orders of the authorities below and direct that impugned interest income is capital receipt not chargeable to tax during assessment year under appeal. Accordingly, appeal of the Assessee is allowed.
Issues Involved:
1. Assessment of interest income from Fixed Deposit Receipts (FDRs) during the pre-operative period. 2. Classification of interest income as "Income from other sources" versus capital receipt. 3. Applicability of previous judicial precedents on similar issues. 4. Admissibility of additional grounds of appeal. 5. Netting of interest income with interest paid on borrowed funds. Issue-wise Detailed Analysis: 1. Assessment of Interest Income from FDRs During Pre-Operative Period: The primary issue in this case is whether the interest income of ?1,53,70,579/- earned from FDRs during the pre-operative period should be assessed as "Income from other sources" or as a capital receipt. The assessee argued that this interest income should be treated as a capital receipt and adjusted against the project cost. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as income from other sources, relying on the judgment in Tuticorin Chemicals and Fertilizers Ltd. (227 ITR 172 (SC)). 2. Classification of Interest Income as "Income from Other Sources" Versus Capital Receipt: The assessee contended that the funds were not surplus but were temporarily parked in FDRs for the purpose of the project. The interest earned was inextricably linked with the implementation of the transmission-line project and should be treated as a capital receipt. The Tribunal referred to several judicial precedents, including the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. (315 ITR 255), which held that interest earned on funds primarily brought for infusion in the business is a capital receipt if earned before the commencement of business. 3. Applicability of Previous Judicial Precedents: The Tribunal noted that similar issues had been decided in favor of the assessee in previous cases, such as Bokaro Steel Ltd. (236 ITR 315 (SC)) and Indian Oil Panipat Power Consortium Ltd. (315 ITR 255 (Del)). The Tribunal also referred to its own decision in the case of the same assessee for A.Y. 2009-2010, where it was held that the interest income was a capital receipt and not chargeable to tax. 4. Admissibility of Additional Grounds of Appeal: The assessee raised an additional ground, arguing that if the interest income is taxable, it should be netted against the interest paid on borrowed funds. The Tribunal admitted this additional ground, citing the judgment of the Supreme Court in National Thermal Power Company Ltd. (229 ITR 383 (SC)), which allows raising additional grounds of appeal pertaining to questions of law. 5. Netting of Interest Income with Interest Paid on Borrowed Funds: The assessee argued that the interest income should be netted against the interest paid on borrowed funds. However, since the primary issue was decided in favor of the assessee, holding that the interest income was a capital receipt, the question of netting did not arise. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the interest income earned during the pre-operative period was a capital receipt and not chargeable to tax. This decision was based on the consistent judicial view that interest earned on funds inextricably linked to the setting up of a project is a capital receipt. The Tribunal set aside the orders of the authorities below and directed that the interest income should be treated as a capital receipt.
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