9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2017 (3) TMI 1038 - AT - Income TaxInterest income from securities - amount deposited with Paschim Gujarat Vij Co.Ltd for availing electricity for the purposes of construction of power plant - whether treated as revenue in nature chargeable to tax under the head income from other sources? - Held that - The assessee is engaged in the business of special purpose vehicle and during the assessee was engaged in the construction of electricity plant at Mundra, Gujarat and he security deposit was given purely to avail the electricity for the purpose of construction of plant which by no stretch of imagination would be treated as revenue in nature as the sole purpose behind the advancing security was to avail electricity for the construction purpose and therefore inextricably linked with the construction of the plant. We also find that the similar issue arose in the assessment year 2009-10 and the FAA decided the issue in favour of the assessee and the appeal filed by the revenue before the ITAT was also dismissed by the Tribunal. In the case of Bokaro Steel Ltd (1998 (12) TMI 4 - SUPREME Court) held that the interest from advances paid to contractor by the assessee for the purpose of facilitating the work of construction is incidental to the work of construction of plant undertaken by the assessee and receipt accruing from the said advances was held to be capital receipt and not income of the assessee from other independent sources. The deposit has been given by the assessee in order to avail electricity so that the construction of the project is facilitated. In our opinion, the assessee has advanced money which is connected to construction of plant and therefore, we are not in agreement with the conclusion drawn by the ld.CIT(A). Therefore, respectfully following the ratio laid down above we set aside the order of the ld. CIT(A) and direct the AO to treat the interest as capital receipt by deleting the disallowance. - Decided in favour of assessee. Disallowance of interest expenditure on the borrowings claimed as deduction against the interest income from the fixed deposits - Held that - As decided in assessee s own case for AY 2009-2010 we find that there is a direct nexus of funds of the borrowed capital with the Fixed Deposits in question partly. The interest paid on a loan taken to avoid premature encashment of the Fixed Deposit is deductible against the interest earned on the Fixed Deposit as held in the case of Raj Kumari Agarwal vs. DCIT 2014 (7) TMI 867 - ITAT AGRA . Having decided on the issue of nexus of funds and the allowability of the interest expenses against the interest income, the remaining issue is about the interest rate of 7.81% applied by the AO in determining the interest expenses. In our opinion, this requires revisit of the issue to the file of the AO. Assessee must demonstrate before the AO the exact account of interest expenses relatable to the interest income in question. If necessary, AO shall admit the letters from the bank, if any, in the interest of justice.
Issues Involved:
1. Taxability of interest income from securities deposited with Paschim Gujarat Vij Co. Ltd (PGVCL). 2. Disallowance of interest expenditure on borrowings claimed as a deduction against interest income from fixed deposits. Issue-wise Detailed Analysis: 1. Taxability of Interest Income from Securities Deposited with PGVCL: The primary issue raised by the assessee pertains to the taxability of interest income amounting to ?88,72,800/- received from PGVCL. The assessee argued that this interest income should be treated as a capital receipt and credited to the capital work-in-progress, citing the Supreme Court decision in Commissioner of Income-tax v. Bokaro Steel Ltd., [1999] 236 ITR 315 (SC). The assessee contended that the interest income was incidental to the construction of a 400 MW power plant and thus should not be taxed under the head "income from other sources." The AO, however, treated the interest income as taxable under "income from other sources," relying on various judicial precedents, including Tuticorin Alkali Chemicals and Fertilizers Ltd V/s CIT 227 ITR 172 (SC) and South India Shipping Corp. Ltd V/s CIT -240 ITR 24(Mad). The AO's stance was upheld by the First Appellate Authority (FAA), who distinguished the facts of the Bokaro Steel Ltd case from the present case, noting that the interest income in Bokaro Steel Ltd was adjusted against construction costs, whereas in the present case, the interest income from security deposits with PGVCL was not similarly adjusted and was available for the assessee’s free use. The FAA further cited the Supreme Court decision in Pandian Chemicals Limited, which held that interest on deposits with the Electricity Board could not be said to be derived directly from the industrial undertaking and thus was taxable as revenue in nature. The FAA also referred to several other judgments supporting the view that such interest income should be treated as taxable under "income from other sources." Upon appeal, the Tribunal considered the arguments and precedents and found that the interest income from the security deposit with PGVCL was indeed incidental to the construction of the power plant. The Tribunal noted that the assessee had credited the interest income to the profit and loss account but excluded it in the return of income, treating it as a capital receipt. The Tribunal also observed that a similar issue had been decided in favor of the assessee in the previous assessment year 2009-10, where the interest income from the security deposit was treated as a capital receipt. The Tribunal concluded that the interest income was inextricably linked with the construction of the plant and thus should be treated as a capital receipt, following the Supreme Court decisions in Bokaro Steel Ltd and Karnal Co-operative Sugar Mills Ltd. Consequently, the Tribunal set aside the order of the CIT(A) and directed the AO to treat the interest income as a capital receipt, thus allowing the assessee's appeal on this ground. 2. Disallowance of Interest Expenditure on Borrowings Claimed as Deduction Against Interest Income from Fixed Deposits: The second issue involved the confirmation by the FAA of the disallowance of interest expenditure on borrowings claimed as a deduction against the interest income of ?18,26,501/- from fixed deposits. The assessee argued that this issue was covered in its favor by the decision of the Tribunal in the assessee’s own case for the earlier assessment year 2009-10. The Tribunal reviewed the previous decision and found that the issue of the nexus of funds had been deliberated by the AO and CIT(A), and it was established that there was a direct nexus between the borrowed capital and the fixed deposits. The Tribunal in the earlier case had allowed the interest expenditure as a deduction against the interest income, noting that the interest paid on a loan taken to avoid premature encashment of the fixed deposit was deductible. In the present case, the Tribunal found that the facts were materially the same as in the earlier case and thus followed the same reasoning. The Tribunal set aside the order of the CIT(A) and directed the AO to allow the interest expenditure as a deduction against the interest income from fixed deposits. Therefore, the assessee's appeal on this ground was also allowed. Conclusion: The Tribunal allowed the appeal of the assessee on both grounds, directing the AO to treat the interest income from PGVCL as a capital receipt and to allow the interest expenditure on borrowings as a deduction against the interest income from fixed deposits. The order was pronounced in the open court on 15th March 2017.
|
