2023 (5) TMI 1106 - AT - Income Tax

Nature of receipts - treatment to toll charges during the project construction - capital receipt or revenue receipts - HELD THAT - As during the construction of the 6 lane toll road, assessee was not free to utilize the toll receipts but was obliged to use the toll receipts in construction of the project as per the overriding obligation under the Concession Agreement and Escrow Agreement and assessee had in fact utilized the toll receipts in the project construction - toll receipts received during the period of project construction were inextricably linked to the project because it was mandatorily required to be used for the construction of the project - thus correctly treated as capital receipts and held that assessee had rightly reduced the same from the cost of project. Decided against revenue. Addition of interest income on fixed deposit as treated by AO as taxable income - As per AO interest income was Revenue in nature and it had no relation with the construction of capital assets which was 6 laning of highway - HELD THAT - Assessee was required to provide Bank Guarantee to NHAI for the performance of its obligations under the concession agreement and for the purpose of opening such bank guarantee, assessee had to open an Fixed Deposit with Canara Bank as margin money and on such margin money assessee had received impugned interest. Contention of assessee that interest earned was inextricably linked to the construction of the project accepted. As in the case of Indian Oil Panipat Power Consortium Limited 2009 (2) TMI 32 - DELHI HIGH COURT had decided the issue in favour of the assessee. Decided against revenue.

Summary

Issues Involved:
1. Treatment of toll charges as revenue receipts.
2. Treatment of interest income on fixed deposits as taxable income.

Summary:

Issue 1: Treatment of Toll Charges as Revenue Receipts

The Revenue appealed against the deletion of the addition of Rs.108,74,52,438/- made by the AO by treating toll charges as revenue receipts. The AO had determined that the toll charges collected by the assessee during the construction period of a six-lane highway project were revenue in nature. The assessee argued that these toll charges were capital receipts, meant to be used for the construction of the project as per the Concession Agreement and Escrow Agreement with NHAI.

The CIT(A) observed that the toll charges collected during the construction period were to be deposited in an Escrow account and used exclusively for the project's construction. The CIT(A) concluded that these receipts were capital in nature and should be reduced from the project cost. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not provide any substantial evidence to counter the CIT(A)'s findings or the applicability of the cited judicial decisions.

Issue 2: Treatment of Interest Income on Fixed Deposits as Taxable Income

The Revenue also appealed against the deletion of the addition of Rs.7,88,480/- made by the AO, who treated the interest income on fixed deposits as taxable income. The AO argued that the interest income had no relation to the construction of the capital asset. The assessee contended that the fixed deposits were made as margin money for a bank guarantee required under the Concession Agreement with NHAI, and the interest earned was to be used for the project's construction.

The CIT(A) agreed with the assessee, referencing the Concession Agreement and relevant judicial decisions, including the Hon'ble Delhi High Court's ruling in CIT v. Jaypee DSC Ventures Ltd. and Indian Oil Panipat Power Consortium Limited v. ITO. The CIT(A) concluded that the interest income was inextricably linked to the project's construction and should be treated as a capital receipt. The Tribunal upheld the CIT(A)'s decision, finding no fault in the CIT(A)'s reasoning or the applicability of the cited judicial decisions.

Conclusion:

The appeal of the Revenue was dismissed in its entirety.

Order pronounced in the open court on 25.05.2023