2022 (8) TMI 563 - AT - Income Tax

Nature of receipt - Receipt of interest income - revenue or capital receipt - As necessary on the part of the assessee to revise the audited financial statements before filing the revised return of income, as the assessee has failed to do so and the same is treated as revenue expenditure and assessable as income from other sources and determined the assessed income - HELD THAT - It is undisputed fact that the assessee company incorporated for the purpose to carry on the business to set up, manage, operate and maintain a Rail Based Mass Rapid Transport System around and between Ahmedabad and Gandhinagar in the State of Gujarat. Both the Central and the State Governments are to provide requisite finaces for implementation of the said project and the funds from the Central and State Government flow directly to the assessee company. Thus the assessee company is a SPV formed by the Central Government and State Governmet of Gujarat and there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank has to be applied only for the purpose of welfare of the State as provided in the guidelines. We have no hesitation in holding the order passed by the Ld. CIT(A) that the interest income is to be treated as capital in nature and therefore the addition made by the Assessing Officer is hereby deleted. Thus the grounds of appeal raised by the Revenue are hereby rejected and Cross objection raised by the Assessee are hereby allowed.

Issues Involved:
1. Treatment of interest income as revenue receipt or capital receipt.
2. Applicability of the Kolkata Metro Rail Corporation Ltd. decision.
3. Requirement to revise audited financial statements before filing a revised return.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Treatment of Interest Income as Revenue Receipt or Capital Receipt:
The primary issue revolves around whether the interest income earned by the assessee on surplus/unutilized funds should be treated as a revenue receipt taxable under "income from other sources" or as a capital receipt. The assessee initially treated the interest income as a revenue receipt but later revised the return to treat it as a capital receipt, following the decision in the case of Kolkata Metro Rail Corporation Ltd.

The Assessing Officer (AO) did not accept the revised return, arguing that the assessee did not revise the audited financial statements and thus, the interest income should be treated as revenue expenditure. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition made by the AO, citing the Kolkata Metro Rail Corporation Ltd. case, where similar interest income was treated as a capital receipt.

2. Applicability of the Kolkata Metro Rail Corporation Ltd. Decision:
The CIT(A) compared the facts of the assessee's case with those in the Kolkata Metro Rail Corporation Ltd. case and found them to be similar. Both companies were set up for laying down rail infrastructure and received capital grants from the government. The CIT(A) noted that the interest income earned by the assessee on surplus funds, which were inextricably linked to the setting up of the project, should be treated as capital receipts. The Tribunal upheld this view, emphasizing that the interest income was to be utilized exclusively for the project and thus, should be capitalized and set off against pre-operative expenses.

3. Requirement to Revise Audited Financial Statements Before Filing a Revised Return:
The AO contended that the assessee should have revised its audited financial statements before filing the revised return. However, the Tribunal found that the assessee's treatment of interest income as a capital receipt was consistent with accounting standards and the factual position of the case. The Tribunal noted that the interest income was credited in the Profit & Loss Account and adjusted against the project cost, which was in line with the practice followed in subsequent years.

4. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. However, the CIT(A) dismissed this ground, stating that the initiation of penalty proceedings was premature and no appeal lies against the initiation of proceedings under section 274 of the Act. The Tribunal upheld this view, noting that the issue of penalty was not ripe for adjudication at this stage.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. It held that the interest income earned on surplus funds, which were inextricably linked to the setting up of the project, should be treated as a capital receipt. The Tribunal relied on the decisions in the cases of Kolkata Metro Rail Corporation Ltd., Bangalore Metro Rail Corporation Ltd., and Rohtak Panipat Tollway Pvt. Ltd. to support its conclusion. The initiation of penalty proceedings was deemed premature, and no appeal was entertained on this ground.

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