2015 (6) TMI 632 - AT - Income Tax

Treatment to the interest received on account of bank deposit - capital receipt or income from other sources - Held that - In the present case, the funds were not surplus funds as the fixed deposits which were made from October onwards were redeemed till April 2009 and funds were utilized for contract payments for the project. During proceedings before Ld. CIT(A), the assessee had filed copy of contract awarded during July 2008 to June 2009 and it had demonstrated that funds which were kept temporarily in the form of fixed deposits were linked with the setting up of project and cannot be categorized as surplus funds. We find that the facts in the present case are also similar to the facts in the case of Indian Oil Panipat Power Consortium Ltd. (2009 (2) TMI 32 - DELHI HIGH COURT). In the present case also, amount was invested by joint venture partner by raising share capital and funds were directly linked with setting up of project. Ld. CIT(A) has made a clear finding with respect to linkage of funds treating the interest income received on account of bank deposit as capital receipt. Therefore, in view of above, we do not find any infirmity in the order of Ld. CIT(A) and the same is upheld. - Decided against revenue.

Summary

Issues:
1. Treatment of interest income as capital receipt instead of income under other sources.
2. Allowance to adjust interest income against preoperative expenses.

Issue 1: Treatment of Interest Income:

The appeal was filed by the Revenue against the order of Ld. CIT(A) regarding the treatment of interest income of Rs. 70,75,843 received on bank deposits as a capital receipt instead of income under other sources. The Revenue contended that the interest income should be treated as income from other sources based on the case law of Tuticorin Alkali Chemicals and Fertilizers Ltd. The Assessing Officer (A.O.) observed that the interest income was reduced from capital work-in-progress and asked for an explanation. The assessee claimed that the fixed deposits were margin money for procuring capital goods for the project. However, the A.O. rejected this claim, stating that the funds were not used for capital goods procurement based on the asset schedule. The A.O. relied on the Tuticorin case and added the interest income as income from other sources.

Issue 2: Allowance to Adjust Interest Income:

The assessee appealed before Ld. CIT(A), distinguishing the facts of Tuticorin and arguing that the funds raised were linked to the project. The Ld. CIT(A) allowed relief, noting the funds' linkage to capital assets acquisition. The interest earned on funds raised as share capital was considered a capital receipt and was set off against preoperative expenses. The Ld. CIT(A) relied on the Indian Oil Panipat Power Consortium Ltd. case. The Revenue appealed, arguing the applicability of Tuticorin and lack of compulsion for fixed deposits. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing the linkage of funds to the project. The Tribunal found the case similar to Indian Oil Panipat Power Consortium Ltd., where the interest earned was not treated as income from other sources due to the funds' direct link to the project.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision to treat the interest income as a capital receipt linked to the project and allowing its adjustment against preoperative expenses. The judgment highlighted the importance of the direct linkage of funds raised to the project's development, following the precedent set by relevant case laws.