2023 (2) TMI 1055 - AT - Income Tax

Interest Income Other Income vs. Pre-Operative Expenses - Disallowance of expenses - assessee has not earned any business income relating to the project which is yet to commence - AO treated the expenditure claimed by the assessee as part of the capital work-in-progress and the interest income earned by the assessee, he has treated the same as income from other sources which assessee has earned by depositing the funds in fixed deposit - HELD THAT - Assessee has entered into escrow agreement with original lenders (Axis Bank Limited) and Escrow Bank by Standard Chartered Bank, as per the terms of the agreement assessee has to maintain reserve amounts as per clause (ii) of the construction of the Escrow Agreement as per which assessee has to maintain statutory Dues Account, Project Construction Account, Operation And Maintenance Account and the NHAI Account, Debt Payment Account and other similar accounts. Assessee was allowed to withdraw only through Escrow Account for withdrawal during construction period and also assessee was allowed to make investment only in permitted investments. By respectfully following the terms of agreement assessee has made the investment through permitted investments and earned the interest income. The relevant data are submitted by the assessee as part of the Paper Book. It clearly shows that the operation of funds are relating to the same project as well as the interest earned through permitted investments are also part of the same project. As held in the above said case the interest earned by the assessee through Due Account and permitted investment are part of the same project and accordingly, we direct the AO to allow the interest earned by the assessee as capital income and should be reduced from the capital work-in-progress of the project. Accordingly, Ground raised by the assessee are allowed.

Issues Involved:
1. Classification of interest income earned from fixed deposits.
2. Treatment of expenses debited to Profit & Loss Account as pre-operative expenditure.

Issue-wise Detailed Analysis:

Issue 1: Classification of Interest Income Earned from Fixed Deposits

The primary issue in this appeal was whether the interest income earned by the assessee from fixed deposits should be classified under "Income from Other Sources" or "Income from Business/Profession." The Assessing Officer (AO) treated the interest income of Rs. 9,28,09,550 as "Income from Other Sources," relying on the Supreme Court's decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [227 ITR 172 (SC)]. The AO argued that since the project had not commenced, the income from fixed deposits should be taxed as "Income from Other Sources."

The assessee contended that the interest income was inextricably linked to the project funds and should be classified as "Income from Business/Profession." The assessee cited several judicial precedents, including the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. v. ITO [181 Taxmann 249], which distinguished between surplus funds and funds inextricably linked to the project.

The ITAT considered the case of Hazaribagh Expressway Ltd. v. ITO, where it was held that interest earned from time deposits kept out of surplus funds available to the assessee out of project funds should be reduced from capital work-in-progress. The ITAT noted that the assessee had entered into an escrow agreement with banks, and the funds were used for the specific purpose of the project, thus inextricably linking the interest income to the project.

Decision:
The ITAT directed the AO to treat the interest income as capital income and reduce it from the capital work-in-progress of the project, aligning with the view that the interest earned was inextricably linked to the project funds.

Issue 2: Treatment of Expenses Debited to Profit & Loss Account as Pre-Operative Expenditure

The AO disallowed the expenditure claimed by the assessee, amounting to Rs. 11,20,21,510, treating it as pre-operative expenditure and adding it to the capital work-in-progress. The AO's rationale was that the project had not commenced, and thus, the expenses should be capitalized.

The assessee argued that the expenses were related to administration and other general overheads, which were correctly debited to the Profit & Loss Account. The assessee contended that only costs directly attributable to the construction of the project were capitalized, and the remaining costs were rightly charged to the Profit & Loss Account.

The ITAT considered the submissions and observed that the expenses claimed were related to work-in-progress. The ITAT agreed with the AO's view that since the project had not commenced, the expenses should be capitalized and treated as part of the capital work-in-progress.

Decision:
The ITAT upheld the AO's decision to treat the expenses as pre-operative expenditure and add them to the capital work-in-progress.

Conclusion:
The appeal was partly allowed. The ITAT directed the AO to treat the interest income as capital income and reduce it from the capital work-in-progress, while upholding the AO's decision to treat the expenses as pre-operative expenditure.

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