2019 (11) TMI 642 - AT - Income Tax

Interest income on deposit of margin money with Bank - assessee reduced the interest income from capital work-in-progress (CWIP) - Treatment of income so earned was not accepted by Assessing Officer - AO treated the same as Income from Other Sources' - HELD THAT - We are of the view that the interest income earned by assessee from margin money deposit with Bank for availing Bang Guarantee, letter of credit facilities for the purpose of procurement of equipment and other material for setting up of power plant will not partake the character of income from other sources. The interest receipt is inextricably linked to business partakes the character of capital receipt and so rightly allowed to be reduced from WCIP by CIT(A), which we affirmed. Hence, the ground of appeal raised by revenue is dismissed.

Issues Involved:
1. Classification of interest income on margin money deposits.
2. Treatment of interest income as Business Income or Income from Other Sources.
3. Applicability of previous judicial decisions on similar matters.
4. Tax effect and applicability of CBDT Circular No. 17/2019.

Detailed Analysis:

1. Classification of Interest Income on Margin Money Deposits:
The primary issue was whether the interest earned on margin money deposits for obtaining bank guarantees and letters of credit for setting up a power plant should be classified as "Business Income" or "Income from Other Sources."

2. Treatment of Interest Income as Business Income or Income from Other Sources:
The assessee, a company engaged in power generation, earned interest on deposits of margin money with banks during the setup of a coal-based power plant. The assessee reduced this interest income from capital work-in-progress (CWIP) and did not offer it for separate taxation. The Assessing Officer (AO) treated this income as "Income from Other Sources." However, the Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's treatment, classifying it as "Business Income," which led to the revenue's appeal.

3. Applicability of Previous Judicial Decisions on Similar Matters:
The Tribunal noted that the issue was covered by previous decisions in similar cases, such as ACIT vs. Essar Gujarat Power Ltd. and ACIT vs. Essar Power Transmission Company Ltd. The Tribunal referred to the Supreme Court decisions in CIT vs. Bokaro Steel Ltd. and CIT vs. Karnal Co-operative Sugar Mills Ltd., which held that interest received on deposits linked to the acquisition of assets for setting up a plant is a capital receipt, not taxable as income from other sources.

The Tribunal reiterated that if the funds are used for setting up a business apparatus, the interest earned should reduce the cost of the assets and be treated as a capital receipt. This principle was applied in the assessee's group cases, confirming that the interest income had a direct and intimate connection with the business setup.

4. Tax Effect and Applicability of CBDT Circular No. 17/2019:
In one of the appeals (ITA No. 1507/Mum/2018), the tax effect involved was less than the monetary limit prescribed by CBDT Circular No. 17/2019. The Tribunal dismissed the appeal based on this circular, which precludes the revenue from filing appeals where the tax effect is below ?50,00,000. However, the Tribunal allowed the revenue to revive the appeal if it is later discovered that the tax effect exceeds the prescribed limit.

Conclusion:
The Tribunal dismissed all the appeals filed by the revenue. It upheld the CIT(A)'s decision that the interest income earned on margin money deposits for obtaining bank guarantees and letters of credit for setting up a power plant should be treated as a capital receipt, reducing the cost of the capital work-in-progress, and not as income from other sources. The Tribunal's decision was consistent with previous judicial decisions and the CBDT circular on tax effect limits.

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