2023 (6) TMI 342 - AT - Income Tax

Interest earned from FDRs during preoperative period - income from other sources or capital receipts - - whether the interest earned by the assessee from the short term fixed deposits with scheduled banks is liable to be credited in pre-operative expenses, treating the same being a capital receipt, thereby, reducing it from project cost? - HELD THAT - The assessee company claims that during financial year it was in the process of setting up of a fertilizer manufacturing unit at Kanpur by revamping and renovating a sick industrial unit taken over under a Rehabilitation Scheme. For revamping and renovating of sick industrial unit, it arranged funds in the form of share holder s and debt funds. These FDRs were kept as margin money for the project implementation, hence for business expediency. Thus, the interest being inextricably linked to project is a capital receipt that goes to reduce the cost of project and accordingly, the assessee correctly reduced the same from the cost of expenditure on the project. The fact that FDRs were utilized as margin money against bank guarantee, that was given to Indian Oil Corporation and other State entities, is not rebutted by the learned DR. Thus, the issue is squarely covered by the decision of Indian Oil Panipat Powers Consortium Ltd. 2009 (2) TMI 32 - DELHI HIGH COURT . Assessee appeal allowed.

Issues Involved:
1. Treatment of interest income from FDRs during the preoperative period.
2. Netting of interest income against interest paid.
3. Conformity with Accounting Standards.
4. Nexus between FDRs and project funds.
5. Charging of interest under section 234B.
6. General grounds challenging the assessment and CIT(A) order.

Summary:

1. Treatment of Interest Income from FDRs:
The primary issue was whether the interest income of Rs. 1,93,75,802/- earned from Fixed Deposit Receipts (FDRs) during the preoperative period should be treated as "income from other sources" or as a capital receipt to be set off against preoperative expenses. The assessee argued that the interest income should reduce the project cost as the funds were not surplus but inextricably linked to the project. The Tribunal referred to the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. v. ITO 315 ITR 255, which distinguished between surplus funds and funds inextricably linked to a project, ruling that the latter should be capitalized and set off against preoperative expenses.

2. Netting of Interest Income:
The assessee contended that the interest income should be netted against the higher interest paid on debt funds linked to the project. The Tribunal noted that the interest income earned from FDRs was inextricably linked to the project, and thus, it should be treated as a capital receipt, reducing the project cost, rather than being assessed as income from other sources.

3. Conformity with Accounting Standards:
The assessee argued that treating the interest from FDRs as income from other sources was contrary to binding Accounting Standards, specifically AS-16, which requires that the eligible cost of borrowed funds be reduced by any income earned from their temporary investment. The Tribunal found merit in this argument, emphasizing that standard accounting practices should not be discarded unless they conflict with specific provisions of the Act.

4. Nexus Between FDRs and Project Funds:
The Tribunal examined whether the FDRs were intrinsically linked to the project funds. It was established that the FDRs were kept as margin money for bank guarantees issued to entities like Indian Oil Corporation and state governments, proving that the interest income was inextricably linked to the project. Consequently, the interest income was deemed a capital receipt, reducing the project cost.

5. Charging of Interest Under Section 234B:
The assessee challenged the interest charged under section 234B. However, the Tribunal's decision primarily focused on the treatment of interest income from FDRs and did not provide a detailed analysis of this ground.

6. General Grounds:
The assessee raised general grounds challenging the assessment and the CIT(A)'s order, claiming they were against the law and facts of the case. The Tribunal's decision to treat the interest income as a capital receipt effectively addressed these general grounds, leading to the allowance of the appeal.

Conclusion:
The Tribunal directed the Assessing Authority to delete the disallowance, treating the interest income from FDRs as a capital receipt to be set off against preoperative expenses, thereby allowing the appeal in favor of the assessee. The decision was based on the principles established in the judgments of Indian Oil Panipat Power Consortium Ltd. v. ITO and Bokaro Steel Ltd., distinguishing it from the Tuticorin Alkali Chemicals case.

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