2019 (1) TMI 1132 - AT - Income Tax

Accrual of income - Addition u/s 56 - interest received from SBI - Income earned before commencement of the business - reduce interest income arising from deposits placed with SBI out of project development expenditure - Held that - CIT(A) has observed on facts that assessee kept fixed deposit as margin money with SBI for obtaining bank guarantee to avail term loan facility for the project related works. The margin money kept is 10% of the bank guarantee of ₹ 150 Crores obtained from SBI. The CIT(A) thus found that deposits were integrally connected with the setting up of power plant. 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 deposits placed with SBI 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. - decided against revenue Interest income on funds kept as fixed deposits - Treated to be revenue income and consequently not liable to be set off against project development costs - Held that - The action of the assessee merely reduces the interest costs on borrowed funds to some extent. Therefore, interest on borrowed funds and interest earned on fixed deposits cannot be given varied treatment where the interest costs have been capitalized to the power project. We do not visualize any justifiable reason for holding the interest income on fixed deposits out of borrowed funds and utilized for furtherance of the project to be of revenue character. The conclusion drawn by the CIT(A) is thus manifestly mis-conceived and thus deserves to be set aside and reversed. The action of the CIT(A) in upholding the interest income received from IDBI Bank as taxable revenue income under s.56 of the Act is thus wholly untenable and consequently, the treatment adopted by the assessee in this regard requires to be restored. 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.

Issues Involved:
1. Taxability of interest income earned from deposits with State Bank of India (SBI).
2. Taxability of interest income earned from deposits with IDBI Bank Ltd.
3. Allowability of netting off interest income against interest expenditure.
4. Allowability of expenses incurred towards interest on borrowed funds under section 57(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income Earned from Deposits with SBI:

The Revenue challenged the CIT(A)'s decision to treat the interest income of ?1,45,50,007 earned from SBI as a capital receipt, reducing the project development expenditure. The CIT(A) found merit in the assessee's plea, holding that the interest income derived from SBI was inextricably linked to the setting up of the power plant and should thus be treated as a capital receipt. This decision was based on the principle that such receipts reduce the cumulative project development expenditure, including significant interest costs. The Tribunal upheld the CIT(A)'s decision, agreeing that the interest income from SBI should reduce the project costs and not be treated as taxable revenue income.

2. Taxability of Interest Income Earned from Deposits with IDBI Bank Ltd.:

The CIT(A) upheld the AO's decision to treat the interest income of ?2,23,06,911 from IDBI Bank as taxable revenue income. The CIT(A) reasoned that the interest earned on deposits placed with IDBI Bank was not inextricably linked to the setting up of the power plant. However, the Tribunal disagreed with this conclusion, noting that the deposits were made out of borrowed funds for obtaining bank guarantees necessary for the project. The Tribunal found that both the interest expenditure and interest income were inextricably linked to the project, and thus, the interest income should be treated as a capital receipt, reducing the project costs.

3. Allowability of Netting Off Interest Income Against Interest Expenditure:

The assessee argued for the netting off of interest income against the substantial interest expenditure incurred. The CIT(A) directed the AO to verify the nexus between the interest income and the interest expenditure and allow the netting off if the interest paid was more than the interest earned. The Tribunal upheld this direction, emphasizing that the interest earned on deposits placed with IDBI Bank should be set off against the interest expenditure, as both were linked to the project.

4. Allowability of Expenses Incurred Towards Interest on Borrowed Funds Under Section 57(iii):

The assessee also claimed that if the interest income was taxable under section 56, the related interest expenses should be deductible under section 57(iii). The CIT(A) directed the AO to verify and compute the interest expenditure on borrowed funds and allow the deduction from the interest income earned on the fixed deposits. The Tribunal agreed with this approach, noting that the interest expenses incurred were wholly and exclusively for earning the interest income and should be allowed as a deduction under section 57(iii).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection. The Tribunal held that the interest income from both SBI and IDBI Bank should be treated as capital receipts, reducing the project development expenditure. Additionally, the Tribunal upheld the allowability of netting off interest income against interest expenditure and the deduction of related interest expenses under section 57(iii).

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