2016 (9) TMI 957 - AT - Income Tax

Interest earned on shortterm receipts (STR) prior to commercial operations of the roads - treated as income from other sources rather than reducing it from the capital cost of construction of the roads - Held that - In the instant case, undisputedly, the funds have been borrowed for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilised solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (1997 (7) TMI 4 - SUPREME Court) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of ₹ 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of commercial operations. Therefore, the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head Capital work in progress and the same cannot be brought to tax under the head income from other sources . - Decided in favour of assessee Double taxation of interest income - Held that - From the perusal of the CIT(A) s order it is noted that the interest income of ₹ 1,64,07,481/- was reduced from the interest expenditure debited in the P&L account in other words the interest expenditure has been shown net of interest income of ₹ 1,64,07,481/-. This shows that the interest income has already been credited in the profit and loss account. However, the way it has been reflected in the profit and loss account is by way of reduction from the overall interest expenditure. We accordingly agree with the contentions of the ld. AR that where the income has already been offered in the profit and loss account there is no occasion for the AO to bring the same income to tax again as this will result in double taxation. Hence we direct to delete the addition in the hands of the assessee - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of interest earned on short-term receipts (STR) prior to commercial operations of the roads.
2. Double taxation of interest income of ?1,64,07,481.
3. Depreciation on road and amortization of cost based on the concession period.

Issue-wise Detailed Analysis:

1. Treatment of Interest Earned on Short-term Receipts (STR):
The primary issue is whether the interest earned on STR prior to the commercial operations of the roads should be considered as "income from other sources" or should be reduced from the capital cost of construction. The appellant argued that the interest income is inextricably linked to the setting up of the project and should be reduced from the total expenditure incurred, which is treated as preoperative expenses and capitalized on commencement of commercial operations. The Assessing Officer (AO) and the CIT(A) disagreed, treating the interest income as taxable under "income from other sources," citing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which states that interest income generated prior to the commencement of business should be taxed as income from other sources unless there is a diversion of income by overriding title. The Tribunal, however, found the facts of the case more aligned with the Supreme Court's decision in CIT vs. Bokaro Steel Ltd., where interest income earned during the setting up of the project was considered inextricably linked to the project and thus treated as a capital receipt. The Tribunal concluded that the interest earned on borrowed funds, which were inextricably linked to the setting up of the mega road projects, should be set off against pre-operative expenditure and not taxed as income from other sources.

2. Double Taxation of Interest Income of ?1,64,07,481:
The appellant contended that the interest income of ?1,64,07,481 was taxed twice. The CIT(A) upheld the AO's decision to treat the interest income as taxable under "income from other sources," despite the fact that the interest income had already been credited in the profit and loss account by reducing it from the overall interest expenditure. The Tribunal agreed with the appellant, noting that the interest income had already been offered in the profit and loss account, and thus, taxing it again would result in double taxation. Consequently, the Tribunal directed the deletion of the addition of ?1,64,07,481.

3. Depreciation on Road and Amortization of Cost:
The appellant did not press this ground during the hearing, and thus, the Tribunal dismissed it as not pressed.

Conclusion:
The Tribunal allowed the appeal partly by ruling that the interest earned on STR prior to commercial operations should be set off against pre-operative expenditure and not taxed as "income from other sources." Additionally, it directed the deletion of the addition of ?1,64,07,481 to avoid double taxation. The ground regarding depreciation on the road and amortization of cost was dismissed as not pressed. The order was pronounced on 11/08/2016.