2020 (11) TMI 172 - AT - Income Tax

Characterization of income - Interest on FDR Flexi deposit - Capital gain or revenue receipt - HELD THAT - Assessee explained before the AO with regard to interest on mobilization advance is a capital receipt, therefore, it has been reduced from the capital work-in-progress and in case of interest earned on fixed deposit/flexi deposits is a business income, therefore, it has been treated as a revenue income. AO did not accept the claim of the assessee and treated the same as income from other sources. CIT(A) accepted the claim of the assessee in regard to interest on mobilization advance but he did not agree with the interest received on fixed deposits/flexi deposits and upheld the action of AO holding that the AO has rightly treated the interest earned on FDR Flexi Deposit as income from other sources. We observe from the balance sheet for both the assessment years under consideration that the share application money pending for allotment is also appearing and we have decided the similar issue in the case of M/s Haridaspur Paradip Railway Company Limited 2020 (10) TMI 656 - ITAT CUTTACK in which the issue of share application money were pending for allotment has been remitted back to the file of AO. Before the AO the assessee has also offered it as a business income in the form of written submissions, which has been incorporated by the AO in the assessment order. We found substance on the submission of the ld. CIT-DR. As the issue being similar to the case of Haridaspur Paradip Railway Company Ltd.(supra), therefore, we also remit the issue to the file of AO on the same directions given therein along with some additional direction to the AO for examination as to whether the income which has been transferred into the reserve and surplus account and its utilization, either for revenue purpose or for capital expenditure. The AO is also directed to decide the issue as per law after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to avoid taking any unnecessary adjournment and cooperate with the AO for early disposal of the case. Appeals of the assessee are allowed for statistical purposes.

Issues Involved:
1. Legality and arbitrariness of the AO's order.
2. Classification of interest on FDR and Flexi deposits as revenue receipt vs. capital receipt.
3. Treatment of interest on mobilization advance as capital receipt.
4. Consistency in the treatment of interest income across assessment years.

Detailed Analysis:

1. Legality and Arbitrariness of the AO's Order:
The assessee contended that the order of the AO was illegal, arbitrary, contrary to evidence on record, and without application of mind. The Tribunal did not explicitly address this issue separately but focused on the substantive issues regarding the classification of interest income.

2. Classification of Interest on FDR and Flexi Deposits:
The primary contention was whether the interest on Fixed Deposits (FDR) and Flexi deposits should be treated as revenue receipts or capital receipts. The AO treated the interest as revenue receipts and added it to the income. The CIT(A) upheld this view for the interest on FDR and Flexi deposits.

The assessee argued that the interest income was inextricably linked to the project and should be treated as a capital receipt. The Tribunal referred to various judicial precedents, including the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. v. ITO, which held that interest earned on funds brought for business infusion could not be classified as income from other sources if the income was earned prior to the commencement of business.

The Tribunal also considered the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest on surplus funds should be treated as income from other sources. However, the Tribunal noted that the interest earned on funds inextricably linked to the setting up of a project should be capitalized and set off against pre-operative expenses, as held in Bokaro Steel Ltd.

The Tribunal remitted the matter back to the AO for fresh adjudication, directing the AO to examine whether the interest income was utilized for revenue purposes or capital expenditure and whether it should be treated as a capital receipt.

3. Treatment of Interest on Mobilization Advance:
For the assessment year 2014-2015, the CIT(A) deleted the addition regarding the interest on mobilization advance, accepting it as a capital receipt. The Tribunal did not find it necessary to adjudicate this issue further and dismissed this ground of appeal for the assessment year 2014-2015.

4. Consistency in Treatment of Interest Income:
The AO raised an issue regarding the consistency of the treatment of interest income across different assessment years. The assessee argued that the circumstances changed in the assessment years 2013-2014 and 2014-2015 due to significant infusion of funds through equity shares specifically for the project. The Tribunal agreed that the principle of consistency should be followed only when facts and circumstances remain the same. The Tribunal also noted that if there was an error in the past, it should not be perpetuated.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO for fresh adjudication. The AO was directed to examine the utilization of interest income, whether it was used for revenue purposes or capital expenditure, and to decide the issue as per law after providing a reasonable opportunity of being heard to the assessee. The Tribunal emphasized the need for the assessee to cooperate with the AO for early disposal of the case.

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