2018 (10) TMI 1111 - AT - Income Tax

Addition on account of interest earned in surplus funds parked with banks - treating it as income from other sources OR to be treated as capital receipt and reduced from the cost of per-operative expenses accordingly - Held that - Since the assessee in instant case is not free to use the funds for any purpose except TCB project and since there is no allegation that any part of fund has been used for any other purposes and since no addition was made by the Assessing Officer on this account in assessment year 2009-10, therefore, we find no infirmity in the order of the ld. CIT(A) in deleting the addition made by the Assessing Officer by treating such interest income from fixed deposits as capital receipt which would go to reduce the pre-operative expenditure. We, therefore, uphold the same and the ground raised by the Revenue is dismissed.

Issues Involved:
1. Whether the interest earned on surplus funds parked with banks should be treated as "Income from Other Sources" or as a capital receipt.
2. Whether the interest income is inextricably linked with the setting up of a specific project/purpose.

Issue-wise Detailed Analysis:

1. Treatment of Interest Earned on Surplus Funds:
The primary issue in this case was whether the interest earned on the surplus funds parked in banks should be treated as "Income from Other Sources" or as a capital receipt. The Assessing Officer (AO) treated the interest income of ?1,22,54,520/- as revenue receipt liable to tax, relying on the Supreme Court decision in Tuticorin Alkalies Chemicals Fertilizers Ltd. vs. CIT. The AO argued that the interest earned was an independent income from the investment of surplus funds in fixed deposits, which should be taxed as revenue receipt.

2. Linkage of Interest Income with Specific Project/Purpose:
The CIT(A) and the Tribunal had to determine whether the interest income was inextricably linked with the setting up of the Tara Coal Block Project. The assessee argued that the funds were temporarily parked to reduce the cost of the project and that the interest income should be treated as a capital receipt, reducing the pre-construction expenses. The CIT(A) and the Tribunal found that the funds were indeed linked to the specific project and not available for any other use, thus treating the interest income as a capital receipt.

Detailed Analysis:

1. Treatment of Interest Earned on Surplus Funds:
The AO's decision was based on the premise that the interest income from surplus funds should be treated as "Income from Other Sources." The AO relied on the Supreme Court's decision in Tuticorin Alkalies Chemicals Fertilizers Ltd. vs. CIT, which held that interest earned on borrowed funds before the commencement of business should be treated as revenue receipt. The AO argued that the interest income was an independent income from the investment of surplus funds in fixed deposits, which should be taxed as revenue receipt.

However, the CIT(A) and the Tribunal disagreed with the AO's view. They relied on the Supreme Court decision in Bokaro Steel Ltd. and the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. vs. ITO, which held that if the funds are inextricably linked with the setting up of a project, the interest income should be treated as a capital receipt. The Tribunal noted that the interest income was earned on funds that were temporarily parked while awaiting disbursement for land acquisition and other project-related activities. Therefore, the interest income was inextricably linked with the setting up of the Tara Coal Block Project and should be treated as a capital receipt, reducing the pre-construction expenses.

2. Linkage of Interest Income with Specific Project/Purpose:
The CIT(A) and the Tribunal examined the factual background and the documentary evidence to determine whether the interest income was inextricably linked with the setting up of the Tara Coal Block Project. They found that the assessee company was formed as a joint venture between Chhattisgarh Mineral Development Corporation Limited (CMDCL) and IFFCO Chhattisgarh Power Limited (ICPL) specifically for the Tara Coal Block Project. The funds were raised for this specific project, and the interest income was earned on the funds temporarily parked while awaiting disbursement for project-related activities.

The CIT(A) and the Tribunal noted that the Memorandum of Understanding (MOU) between the Government of Chhattisgarh, CMDCL, and ICPL, as well as the Joint Venture Agreement, clearly indicated that the funds were meant for the Tara Coal Block Project. They also noted that CMDCL had already spent significant amounts on land acquisition and other project-related activities before the formation of the assessee company. The Tribunal found that the funds were earmarked for the specific project, and there was no evidence to suggest that the funds were used for any other purpose.

The Tribunal also considered the decisions in NTPC Sail Power Company Pvt. Ltd. vs. CIT and IFFCO Chhattisgarh Power Ltd. vs. ITO, which supported the view that interest income earned on funds inextricably linked with the setting up of a project should be treated as a capital receipt. The Tribunal concluded that the interest income in this case was inextricably linked with the Tara Coal Block Project and should be treated as a capital receipt, reducing the pre-construction expenses.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to treat the interest income as a capital receipt, reducing the pre-construction expenses. The Tribunal found that the interest income was inextricably linked with the setting up of the Tara Coal Block Project and should not be treated as "Income from Other Sources." The appeal filed by the Revenue was dismissed.

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