2019 (1) TMI 346 - AT - Income Tax

Addition on account of interest income u/s 56 - characterization of interest income earned on advances given to AWEL and interest earned on fixed deposits pending utilization as independent receipt of revenue nature liable to be taxed as income from other sources u/s.56 - Held that - As noticing the process of reasoning applied by CIT(A) and approve his action affirmatively in so far as interest generated on temporary advances given to group concern he has rightly held that interest income to be of capital nature linked with the process of setting up of its power plant and such receipts would go to reduce the cost of the project which also includes huge interest costs as capitalized. Decision of Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT , Karnataka corporation Sugar Mills Ltd. & Bongaigaon Refinery & Petro Chemicals Ltd. vs. CIT 2001 (7) TMI 4 - SUPREME COURT which in turn distinguish the decision of the Hon ble Supreme court in Tuticorin Alkali Chemicals Fertilizers Ltd. 1997 (7) TMI 4 - SUPREME COURT . Thus, we find ourselves in complete agreement with the action of the CIT(A) in upholding the action of AO to reduce interest income arising from short term advances placed with sister concern out of project development expenditure and in reversing the action of the AO in treating the same as revenue income de hors the projects development in progress. The grievance of the Revenue thus is bereft of any merits. Appeal of the Revenue is dismissed. Cross objection filed by the assessee to impugne the action of the CIT(A) in sustaining the interest income on funds kept as fixed deposits pending utilization to be revenue income and consequently not liable to be set off against project development costs CIT(A) in our view, has failed to take notice of the plea that interest expenditure and interest income arise from the same source i.e. borrowed funds. The income and expenditure are thus inextricably linked. We thus are of the view that when the facts are seen in perspective, the action of the CIT(A) appears to suffer from this cardinal error. In the absence of any other activity other than the construction of power plant, the interest expenditure on borrowed funds and incidental income by way of interest mobilized are required to be treated at par. The interest income therefore is eligible for set off against the corresponding interest costs and consequently, such income should be reduced out of interest costs which also form part of the capital expenditure. In this view of the matter, we set aside the action of the CIT(A) and direct the AO to delete the addition made on this score. - decided in favour of assessee

Summary

Issues involved:

1. Deletion of addition made by the AO on account of interest income under Section 56 of the Income Tax Act.
2. Classification of interest income from fixed deposits and its eligibility for set off against project development expenditure.
3. Classification of interest income from deposits with a group company and its eligibility for set off against project development expenditure.

Issue-wise detailed analysis:

1. Deletion of addition made by the AO on account of interest income under Section 56 of the Income Tax Act:

The AO observed that the assessee had earned interest income from temporary deposits and fixed deposits, which were not linked to the setting up of the power plant and thus, classified them as revenue income under Section 56. The CIT(A) revisited the facts and found merit in the assessee's plea for adjustment of interest income from deposits with Adani Welspun Exploration Ltd. (AWEL) against the project development expenditure, but not for interest income from fixed deposits with banks.

2. Classification of interest income from fixed deposits and its eligibility for set off against project development expenditure:

The CIT(A) held that the interest income of ?47,04,267 earned from fixed deposits with Axis Bank and SBI could not be demonstrated by the assessee to be inextricably linked with the setting up of the power plant. Therefore, this interest income was correctly assessed as income from other sources by the AO. The assessee's argument that the funds were temporarily parked pending utilization for the power plant construction was not accepted as sufficient proof of linkage to the project setup.

3. Classification of interest income from deposits with a group company and its eligibility for set off against project development expenditure:

The CIT(A) found that the interest income of ?4,57,53,424 earned from deposits with AWEL was inextricably linked with the construction of the power plant. The funds received from Adani Power Ltd. were temporarily placed with AWEL and later utilized for the power plant project. The CIT(A) relied on the Delhi High Court decision in NTPC Sail Power Company Pvt. Ltd. vs. CIT and the Supreme Court decisions in Bokaro Steel Ltd., Karnataka Power Corporation, and Bongaigaon Refinery & Petrochemicals Ltd., which held that interest earned on funds linked to the project setup should be treated as capital receipts and not revenue income.

Tribunal's Analysis:

The Tribunal upheld the CIT(A)'s decision regarding the interest income from deposits with AWEL, agreeing that it should reduce the project development expenditure. The Tribunal emphasized that both interest expenditure and income were inextricably linked to the project setup and should be treated consistently. The Tribunal rejected the Revenue's appeal and allowed the assessee's cross objection, directing the AO to delete the addition of interest income from fixed deposits, thereby treating it as capital receipt and reducing it from the project costs.

Conclusion:

The Tribunal concluded that the interest income from both fixed deposits and deposits with AWEL should be treated as capital receipts linked to the project setup, thereby reducing the project development expenditure. The Revenue's appeal was dismissed, and the assessee's cross objection was allowed.