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2021 (2) TMI 778 - AT - Income TaxCorrect head of income - Interest income on FDRs - non commencement of business - income from other sources or capital receipt - HELD THAT - As decided in own case 2018 (4) TMI 1853 - ITAT DELHI since the business of the assessee had not commenced, the interest received in the period prior to the commencement of business was in the nature of capital receipt and was required to be set off against the preoperative expenses. Therefore, the impugned interest income is a capital receipt not chargeable to tax during the year under consideration. Accordingly, we allow the grounds of appeal raised by the assessee.
Issues Involved:
1. Classification of interest income from Fixed Deposit Receipts (FDRs) during the pre-operative period. 2. Treatment of interest income as capital receipt versus income from other sources. 3. Netting off interest income against higher interest paid. 4. Application of binding Accounting Standards. 5. Nexus between FDRs and funds for project implementation. 6. Consideration of relevant case laws and submissions. Issue-wise Detailed Analysis: 1. Classification of Interest Income from FDRs During Pre-operative Period: The primary issue in the appeal was whether the interest income of ?57,40,935 from FDRs during the pre-operative period should be classified as income from other sources or as a capital receipt. The assessee argued that this interest income should be treated as a capital receipt to be set off against pre-operative expenses, rather than income from other sources. 2. Treatment of Interest Income as Capital Receipt Versus Income from Other Sources: The assessee contended that the interest income should be treated as a capital receipt based on the binding Accounting Standards and relevant case laws, which dictate that such income should be set off against pre-operative expenses. The Tribunal referred to the assessee's own case in ITA No. 5489/Del/2013 for the assessment year 2009-10, where a similar issue was decided in favor of the assessee. The Tribunal also considered the decision in the case of Adani Power Ltd. vs. ACIT, where the ITAT Ahmedabad Bench analyzed the judgments of the Hon’ble Apex Court in Tuticorin Chemicals and Fertilizers Ltd. and Bokaro Steel Ltd., and the Hon’ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. 3. Netting Off Interest Income Against Higher Interest Paid: The assessee argued that the interest income should be netted off against the substantially higher interest paid, which is linked to the interest earned during the pre-operative period related to the sole project being implemented. The Tribunal found that the interest income should be treated as a capital receipt and set off against pre-operative expenses, rather than being assessed at its gross amount as income from other sources. 4. Application of Binding Accounting Standards: The assessee claimed that the treatment of interest income as income from other sources was contrary to binding Accounting Standards. The Tribunal agreed with the assessee’s contention that the interest income should be treated as a capital receipt to be set off against pre-operative expenses, in line with the relevant Accounting Standards. 5. Nexus Between FDRs and Funds for Project Implementation: The assessee argued that the FDRs were intrinsically linked to the essential funds for the sole object of setting up the project, and therefore, the interest paid and earned had a nexus. The Tribunal, referring to the decision in Indian Oil Panipat Power Consortium Ltd., held that since the funds were inextricably linked to the setting up of the plant, the interest earned was a capital receipt required to be set off against pre-operative expenses. 6. Consideration of Relevant Case Laws and Submissions: The Tribunal considered various judgments, including Tuticorin Alkali Chemicals & Fertilizers Ltd., Bokaro Steel Ltd., Karnal Co-operative Sugar Mills Ltd., Karnataka Power Corporation, and Bongaigaon Refinery & Petrochemicals Ltd. The Tribunal concluded that the interest income earned on funds primarily brought for infusion in the business could not be classified as income from other sources. Since the income was earned in a period prior to the commencement of business, it was in the nature of a capital receipt and hence required to be set off against pre-operative expenses. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the interest income from FDRs during the pre-operative period was a capital receipt not chargeable to tax and should be set off against pre-operative expenses. The order of the lower authorities was set aside, and the appeal was decided in favor of the assessee. Order Pronounced in the Open Court on 05/01/2021.
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