2019 (4) TMI 1160 - AT - Income Tax

Interest received on short term deposits - nature of receipts - deposits kept temporarily with Bank out of advances towards share capital from promoters during the construction period i.e., for purchase of land, grading and development thereof for industrial purposes, development of infrastructure, payment to consultants, civil contractors, advance payments to machinery suppliers, prior to the commencement of business - to be capitalized and set off in capital work-in-progress as contended by the assessee OR is to be taxed as income under the head Income from Other Sources as held by the authorities below - HELD THAT - In the case of Indian Oil Panipat Power Consortium Ltd., Vs. ITO 2009 (2) TMI 32 - DELHI HIGH COURT and the other decisions referred we are unable to sustain the view taken by the learned CIT(A) by placing reliance on the decision in the case of Tuticorin Alkalis Chemicals and Fertilizers Ltd. 1997 (7) TMI 4 - SUPREME COURT . Respectfully following, inter alia, the decision of the Hon ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd.,(supra), we hold that the interest income being the amount invested temporarily in short term deposits out of advance towards equity share capital by promoters are capital receipts and go to reduce the project cost of setting up the aromatic complex at MSEZ with which it is inextricably linked. We, therefore, reverse the findings rendered by the authorities below that the aforesaid interest is exigible to tax under the head Income from Other Sources . Consequently, the grounds raised by the assessee on this issue are allowed.

Summary

Issues Involved:
1. Taxability of interest earned on funds deposited in banks from equity contributions during the construction phase.
2. Whether such interest should be capitalized against capital work-in-progress or taxed as "Income from Other Sources."

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Funds Deposited in Banks from Equity Contributions During the Construction Phase:
The primary issue in this case was whether the interest earned by the assessee on funds deposited in banks, which were contributed by promoters for the construction of an Aromatic Complex, should be taxed as "Income from Other Sources" or capitalized against capital work-in-progress. The Assessing Officer (AO) determined that the interest earned was taxable under "Income from Other Sources," rejecting the assessee's claim for capitalization. The CIT(A) upheld this decision, stating that the deposits were made out of surplus funds.

2. Whether Such Interest Should Be Capitalized Against Capital Work-in-Progress or Taxed as "Income from Other Sources":
The assessee argued that the interest earned on short-term deposits should be capitalized against capital work-in-progress, as the funds were inextricably linked to the project setup. The assessee cited the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. Vs ITO (315 ITR 255), which distinguished between interest earned on surplus funds and funds inextricably linked to project setup. The Tribunal found that the facts of the case aligned with the Indian Oil Panipat Power Consortium Ltd. ruling, where interest earned on funds temporarily placed in fixed deposits awaiting project implementation was deemed capital receipts. The Tribunal also referenced other judicial pronouncements, including Bokaro Steel Ltd. (236 ITR 315) and NTPC SAIL Power Company Pvt. Ltd. Vs. CIT (ITA 1238/2011), which supported the capitalization of such interest.

The Tribunal concluded that the interest earned on funds temporarily invested in short-term deposits, which were advances towards equity share capital by promoters, should be capitalized and set off against capital work-in-progress. This decision was based on the principle that the interest income was inextricably linked to the project setup and should not be taxed under "Income from Other Sources."

Conclusion:
The Tribunal reversed the findings of the lower authorities, ruling that the interest income of ?2,01,30,250/- earned on short-term deposits from equity contributions should be capitalized and not taxed as "Income from Other Sources." The assessee's appeal for the Assessment Year 2008-09 was allowed.