2014 (1) TMI 1327 - AT - Income Tax

Nature of income Interest received on mobilization advance Reduction in claim u/s 80IA of the Act - There was no merit in the order of authorities below with regard to reduction in 80IA claim - this amount is reduced from the cost of the project and as per the contract, this amount to be given credit as misc. receipts in the project account - There is diversion of this interest by overriding title with the contract conditions. The receipts were not taxable in the hands of assessee - Relying upon CIT vs. Bokaro Steel Limited 1998 (12) TMI 4 - SUPREME Court - the interest earned on the advances made to the contractor to facilitate the construction activity of putting together a very large project were held to be capital in nature - As these advances are to ensure that the work of the contractors proceeded without any financial hitches so as to help the contractors - Such arrangements made are inextricably connected with the construction of the project and such receipts adjusted against the charges payable to the contractor reduce the cost of construction - As per the arrangement of the assessee with Railways, interest charged on mobilization advances is to be credited to the concerned product under the misc. receipts which ultimately reduces the cost of the project and the project is the asset of the Ministry of Railways order of the CIT(A) set aside Decided in favour of Assessee.

Issues Involved:
1. Taxability of interest received on mobilization advance.
2. Eligibility for deduction under Section 80IA.
3. Classification of interest as capital receipt or revenue receipt.
4. Credit for pre-paid taxes.

Detailed Analysis:

1. Taxability of Interest Received on Mobilization Advance:
The primary issue was whether the interest received on mobilization advance by the assessee, a company wholly owned by the Ministry of Railways, should be treated as taxable income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest income of Rs.6,37,45,667/- was not derived from the industrial activities of the assessee and thus, should be taxed under the head 'income from other sources'. The AO initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income. The CIT(A) confirmed this addition, stating that the interest earned on advance given to contractors is revenue in character and not a capital receipt.

2. Eligibility for Deduction under Section 80IA:
The assessee argued that the interest income was not included in the profit for claiming deduction under Section 80IA. The interest income was credited to the cost of the project as per the direction of the Ministry of Railways. The assessee contended that the interest income had a direct link to the project and should reduce the project cost, thus not forming part of the taxable income. The Tribunal found merit in the assessee's argument, noting that the interest income was not part of the income on which the deduction under Section 80IA was claimed.

3. Classification of Interest as Capital Receipt or Revenue Receipt:
The assessee claimed that the interest earned on mobilization advances should be treated as a capital receipt, reducing the project cost. The CIT(A) rejected this claim, stating that the interest income is revenue in nature. The Tribunal, however, referred to the Supreme Court decision in CIT vs. Bokaro Steel Limited, which held that interest earned on advances made to contractors to facilitate construction activities is capital in nature and should reduce the project cost. The Tribunal concluded that the interest income was intrinsically connected to the construction project and should be credited to the project account, thus not taxable as income.

4. Credit for Pre-paid Taxes:
The assessee raised an issue regarding the non-credit of pre-paid taxes. The Tribunal directed the Assessing Officer to allow credit for any pre-paid taxes after verifying the facts.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the interest received on mobilization advance was not taxable as income and should be credited to the project cost, thereby reducing the cost of the project. The Tribunal also directed the AO to allow credit for pre-paid taxes after verification. The decision emphasized the treatment of interest income as capital receipt, aligning with the Supreme Court's ruling in CIT vs. Bokaro Steel Limited.

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