2018 (7) TMI 1622 - HC - Income Tax

Treating the interest income received on mobilisation advance to the contractors as revenue income - the said interest income was adjusted in the final bills of the contractor and resulted in reduction of the cost of construction - Held that - The advances, 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 . These facilities were found to be intrinsically connected with the construction of the steel plant. They were found to be rightly held as capital receipts and not income of the assessee from any independent source. Respectfully following the decision of Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT we answer the questions of law in favour of the assessee and against the revenue.

Summary

Issues:
Nature of interest received on mobilization advance - capital income or revenue income.

Analysis:
The appeal raised the issue of whether the interest received on mobilization advance by the assessee to its contractors should be categorized as capital income or revenue income. The revenue initially treated it as revenue income, leading to an appeal. The First Appellate Authority overturned the assessment order partially, classifying the interest income as capital income, citing relevant cases like Commissioner of Income tax v. Bokaro Steel Ltd. The Tribunal, however, did not fully consider the impact of the Bokaro Steel Ltd. decision.

The substantial questions of law revolved around whether the Tribunal was correct in affirming the Assessing Officer's decision to treat the interest income as revenue income, especially when the interest was adjusted in the final bills of the contractor, reducing the cost of construction. The Tribunal's failure to apply the Bokaro Steel Ltd. judgment, which deemed such interest income as a capital receipt, was also a key issue for consideration.

The interest income received by the assessee on mobilization advance was crucial in this case. The advance was provided to contractors to ensure the smooth commencement and completion of work. At the end of the construction project, the interest accrued on the advance was deducted from the final bills of the contractors along with the advance granted. The revenue authorities assessed this income as revenue receipt for the relevant year.

In the analysis of relevant case law, Tuticorin Alkali Chemicals And Fertilisers Ltd. case highlighted that interest income is generally of a revenue nature unless received as damages or compensation. The utilization of a company's capital for productive purposes results in revenue generation rather than capital accretion. Cochin Shipyard Ltd. case, similar to the present scenario, concluded that interest received on loans advanced to contractors for construction work was revenue income. However, the Bokaro Steel Ltd. decision, which was not considered in the Cochin Shipyard Ltd. case, held such interest as capital receipts.

The Bokaro Steel Ltd. judgment, which was extensively analyzed, emphasized that advances made to contractors to ensure the smooth progress of construction projects were integral to the construction activities and deemed as capital receipts. The Supreme Court's decision in Bokaro Steel Ltd. guided the court to rule in favor of the assessee, considering the interest income as capital receipts and not revenue income. The court followed the Bokaro Steel Ltd. decision, setting aside the Tribunal's order and allowing the appeal in favor of the assessee.