2017 (4) TMI 515 - AT - Income Tax

Interest income earned from mobilization advance to contractor Railway Vikash Nigam Ltd. - treated as capital receipt - Held that - The advance which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee form any independent sources. Thus find that the facts of the instant case are similar to the facts of the case which were before the Hon ble Supreme Court in the above case of Bokaro Steel Ltd (1998 (12) TMI 4 - SUPREME Court). In the instant case also, the mobilization advance given to the contractor were for the purpose of contract work of laying down the railway line and intrinsically connected with the capital expenditure of the appellant prior to the commencement of its business. Thus the interest income earned by the assessee from mobilization advance to contractor Railway Vikash Nigam Ltd., is rightly treated by the assessee as capital receipt which goes on to reduce the cost of capital work in progress. Therefore, delete the addition and allow the grounds of appeal of the assessee.

Summary

Issues:
Appeal against CIT(A) order for assessment year 2012-13 - Computation of assessable income - Taxation of interest on mobilization advance - Business expediency - Capital receipt or income from other sources.

Analysis:
1. The assessee company, engaged in laying a new rail line, filed a return of income for assessment year 2012-13. The Assessing Officer found interest income from mobilization advance given to a contractor. The assessee argued the interest should reduce capital work-in-progress, not be taxed as income from other sources.

2. The Assessing Officer disagreed, stating the nature of receipts mattered, not the intention. The CIT(A) upheld taxing the interest as income from other sources, citing the need to utilize surplus funds. The assessee referred to legal precedents to support treating the interest as capital receipt.

3. The Authorized Representative argued that the business was set up when the railway line construction began, similar to other cases. They highlighted decisions where interest income during project execution was treated as capital receipt, not revenue.

4. The Tribunal found the interest income had a nexus with the contract execution and was connected to the capital expenditure. Citing the decision in CIT vs. Bokaro Steel Ltd, the interest was considered a capital receipt reducing the cost of work-in-progress. The Tribunal deleted the addition of interest income, allowing the appeal.

5. The Tribunal's decision aligned with the legal precedent and the nature of the mobilization advance, concluding the interest income was a capital receipt. The appeal was allowed, and the addition of interest income was deleted.

6. The judgment emphasized the connection between the interest income, contract execution, and capital expenditure, following the decision in CIT vs. Bokaro Steel Ltd. The interest earned was considered a capital receipt, reducing the cost of the project, leading to the deletion of the addition by the Assessing Officer.

7. The Tribunal's decision provided clarity on the treatment of interest income from mobilization advance, ensuring consistency with legal precedents and business expediency. The appeal outcome favored the assessee, highlighting the importance of proper categorization of income in line with the project's capital expenditure.