Capitalisation of construction-period interest: interest earned was to be adjusted against interest paid, with only the balance capitalised.

Interest earned during construction was treated as part of the project financing exercise, and the governing principle stated that interest incurred before commencement of production on borrowings used to create fixed assets may be capitalised and added to project cost, unless the borrowing is for working capital. Applying that principle and an earlier binding decision on the same issue, the Court held that the interest received had to be adjusted against interest payments, with only the balance capitalised. The issue was answered against the assessee and in favour of the Revenue.

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Issues: Whether interest received during the relevant assessment years was taxable as revenue income or whether it had to be adjusted against interest payments and only the balance capitalised.

Analysis: The reference turned on the treatment of interest earned while the project was under construction. The Court relied on the principle that interest incurred before commencement of production on borrowings used for creating fixed assets may be capitalised and added to project cost, unless the borrowing is for working capital. Applying the earlier binding decision on the same principle, the Court held that the issue was covered by the rule governing capitalisation of interest during the construction period.

Conclusion: The question was answered in the negative, against the assessee and in favour of the Revenue.

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