2017 (12) TMI 1353 - AT - Income Tax

Set off the interest income against the preoperative expenses in its books of accounts - Held that - In Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME Court) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be inextricably linked to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses. The very purpose of constitution of the Assessee was to act as a Special Purpose Vehicle (SPV) created by the Govt of India and Govt. of West Bengal in the form of Joint Venture with equal equity participation for implementation of rapid transport infrastructure in Kolkata. Both the Central and the State Governments are to provide requisite finances for implementation of the said project. The funds from the Central and State Governments flow directly to the Assessee company as equity and Subordinate Debt/Loans. The objective is to create and maintain a fund for the development of infrastructural assets on a continuing basis and, therefore, the Assessee is a SPV formed by the Government of India and Government of West Bengal as per the guidelines; there is no profit motive as the entire fund entrusted and the interest accrued therefrom on deposits in bank though in the name of the Assessee has to be applied only for the purpose of welfare of the State as provided in the guidelines. Therefore, considering the factual position discussed above, we are of the view that the Assessee has rightly set off the interest income against the preoperative expenses in its books of accounts and therefore we confirm the order passed by the ld CIT(A). - Decided against revenue

Issues Involved:
1. Taxability of interest income under Section 56 of the Income Tax Act, 1961.
2. Classification of interest income as capital receipts or revenue receipts during the pre-operative period.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income under Section 56 of the Income Tax Act, 1961:
The primary issue was whether the interest income earned by the assessee on short-term deposits with banks should be taxed under Section 56 of the Income Tax Act, 1961, as "income from other sources." The Assessing Officer (AO) treated the interest income of ?54,86,324/- as revenue receipts and taxed it accordingly. However, the assessee contended that the interest income was capitalized since it was derived from funds borrowed from the Central and State Governments for the construction of the Metro Rail project and should be treated as capital receipts.

2. Classification of Interest Income as Capital Receipts or Revenue Receipts During the Pre-operative Period:
The assessee argued that the interest income should be considered as capital receipts because it was earned during the pre-operative period and was intrinsically linked to the construction of the Metro Rail project. The CIT(A) accepted this argument, observing that the interest income was earned on short-term deposits made from funds provided by the Central and State Governments for the infrastructure project. The CIT(A) relied on the judgments of the Supreme Court and the Delhi High Court, which held that interest income earned during the pre-operative period on funds that were inextricably linked to the setting up of the project should be treated as capital receipts.

Detailed Judgment Analysis:

Assessment by the AO:
The AO observed that the assessee had received interest from banks amounting to ?54,86,324/- and treated it as revenue receipts, taxable under "income from other sources." The AO rejected the assessee’s contention that the interest income should be capitalized since it was earned from funds borrowed for the construction of the Metro Rail project.

Appeal to CIT(A):
The assessee appealed against the AO’s order to the CIT(A), who allowed the appeal. The CIT(A) found that the interest income was earned during the pre-operative period and was derived from funds provided by the Central and State Governments for the Metro Rail project. The CIT(A) relied on the Delhi High Court’s judgment in the case of Indian Oil Panipat Power Consortium Ltd. v. ITO and the Supreme Court’s judgments in CIT v. Bokaro Steel Ltd. and Challapalli Sugars Ltd. v. CIT, which supported the view that interest income earned on funds linked to the setting up of a project should be treated as capital receipts.

Appeal to ITAT:
The Revenue appealed to the ITAT, reiterating the AO’s stance. However, the ITAT upheld the CIT(A)’s decision, stating that the interest income earned on short-term deposits during the pre-operative period was inextricably linked to the setting up of the Metro Rail project and should be treated as capital receipts. The ITAT noted that the funds were provided by the Central and State Governments specifically for the project and were utilized exclusively for its construction, resulting in a reduction of project costs.

Legal Precedents:
The ITAT referred to the Supreme Court’s judgments in Tuticorin Alkali Chemicals and Bokaro Steel Ltd., emphasizing that if funds are borrowed for setting up a plant and are temporarily parked in fixed deposits, the interest earned should be capitalized if it is linked to the setting up of the plant. The ITAT also cited the Karnataka High Court’s judgment in CIT v. Karnataka Urban Infrastructure Development and Finance Corporation, which held that interest on short-term deposits made from government funds for infrastructure projects is not taxable as income.

Conclusion:
The ITAT concluded that the interest income earned by the assessee during the pre-operative period was a capital receipt and should be set off against pre-operative expenses. The appeals filed by the Revenue were dismissed, and the order of the CIT(A) was confirmed. The ITAT emphasized that the interest income was inextricably linked to the construction of the Metro Rail project and should not be treated as "income from other sources."

Final Order:
Both appeals filed by the Revenue (ITA No.1362/kol/2015 & ITA No.49/kol/2016) were dismissed. The order was pronounced in the open court on 22/12/2017.

← Previous Next →