2022 (4) TMI 1233 - HC - Income Tax

Capitalisation of interest on FDRs earned during the period of construction - while utilizing the ECB funds the assessee did not follow RBI guidelines - HELD THAT - The admitted facts of the present case are that the assessee had taken Foreign ECB loan of ₹ 82.37 crores for the purpose of acquisition of a capital asset i.e. renovation and refurbishment of hotel acquired by the assessee under SARFEASI Act. The entire ECB loan was disbursed in a single trench in the year under consideration and during this year, the assessee could utilise only ₹ 33.70 crores. Therefore, the assessee had temporarily parked the ECB loan in FDRs till utilisation for fixed asset/capital expenditure strictly in compliance with RBI instructions. The assessee had paid interest of ₹ 13.38 crores and has earned interest on FDRs of ₹ 4.03 crores. The net amount of interest of ₹ 9.35 crores has been added to the preoperative expenditure pending capitalization. The judgment passed in Tuticorin Alkali Chemicals 1997 (7) TMI 4 - SUPREME COURT referred to and relied upon by learned standing counsel for the Appellant has been considered and explained subsequently by the Apex Court in Commissioner of Income Tax, Bihar II, Patna vs. Bokaro Steel Ltd., Bokaro 1998 (12) TMI 4 - SUPREME COURT wherein it has been held if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income. The aforesaid principle has also been reiterated by this Court in Principal Commissioner of Income Tax vs. Facor Power Ltd 2016 (1) TMI 461 - DELHI HIGH COURT Keeping in view the aforesaid, this Court is of the opinion that no substantial question of law arises for consideration as the questions sought to be raised in the present appeal are squarely covered by the decisions of the Apex Court as well as this Court. Accordingly, the present appeal is dismissed.

Summary

Issues:
Challenge to ITAT order allowing capitalization of interest on FDRs during construction period without following RBI guidelines.

Analysis:
The appellant challenged the ITAT order dated 29th November, 2019, regarding the capitalization of interest on Fixed Deposit Receipts (FDRs) earned during the construction period without adhering to RBI guidelines. The appellant argued that while utilizing External Commercial Borrowings (ECB) funds, the assessee did not comply with RBI guidelines. The appellant contended that the ITAT erred in not considering decisions of the Apex Court, including Tuticorin Alkali Chemicals and Fertilizers Limited vs CIT, (1997) 227 ITR 172 (SC).

The case involved the assessee obtaining a Foreign ECB loan of ?82.37 crores for renovating a hotel acquired under the SARFEASI Act. During the relevant year, only ?33.70 crores of the loan was utilized, with the remaining amount temporarily parked in FDRs in compliance with RBI instructions. The assessee paid ?13.38 crores as interest and earned ?4.03 crores on FDRs. The net interest amount of ?9.35 crores was added to the preoperative expenditure pending capitalization.

The judgment in Tuticorin Alkali Chemicals was cited by the appellant but was subsequently explained by the Apex Court in Commissioner of Income Tax, Bihar II, Patna vs. Bokaro Steel Ltd., Bokaro, (1999) 1 SCC 645. The court held that amounts linked to setting up plant and machinery are of capital nature and cannot be taxed as income.

Furthermore, a Division Bench of the High Court in Indian Oil Panipat Power Consortium Limited, New Delhi vs. Income Tax Officer, (2009) 315 ITR 255 (Delhi) held that interest earned by the assessee linked to setting up of the plant cannot be treated as income from other sources. This principle was reiterated by the High Court in Principal Commissioner of Income Tax vs. Facor Power Ltd., (2016) 380 ITR 474 (Delhi).

Considering the precedents and legal principles, the High Court concluded that no substantial question of law arose for consideration as the issues raised were covered by decisions of the Apex Court and the High Court. Consequently, the appeal was dismissed.