2015 (7) TMI 151 - AT - Income Tax

Interest income during construction phase on fixed deposits to be capitalized, not taxed as 'Income from Other Sources.'

The Tribunal dismissed the Revenue's appeal, upholding the order of the First Appellate Authority, ruling that interest income earned on fixed deposits ... Interest on deposit with Indian Banks and others - CIT(A) deleted the addition - Held that:- On similar facts and circumstances the E Bench of the Tribunal in the assessee’s own case for the A.Y. 2008-09 [2015 (7) TMI 193 - ITAT DELHI] held that CIT(A) has rightly appreciated the facts of the case and has rightly arrived at the correct conclusion as the funds kept in bank deposits cannot be classified as surplus funds as project was under completion. The argument of Ld. D.R. that facts were not verified by Ld.CIT(A) does not hold any force as Ld.CIT(A) by quoting figures in his roder ahs arrived at the conclusion. Therefore, we do not find any infirmity in the order of Ld.CIT(A) and, therefore, appeal filed by the Revenue is dismissed. - Decided in favour of assessee. Issues Involved:1. Taxability of interest income earned on fixed deposits during the construction phase.2. Classification of interest income as 'Income from Other Sources' under Section 56 of the Income Tax Act, 1961.3. Applicability of the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT.4. Relevance of the decision in CIT vs. Bokaro Steel Ltd. and NTPC SAIL Power Co. (P) Ltd. vs. CIT.Issue-wise Detailed Analysis:1. Taxability of Interest Income Earned on Fixed Deposits During the Construction Phase:The petitioner company, a joint venture between NTPC Ltd. and Tamil Nadu Electricity Board, had parked its funds temporarily in short-term deposits during the construction phase of a power plant. The interest income earned on these deposits was treated as capital receipts by the petitioner, arguing that these funds were necessary for meeting capital expenditure and should be capitalized along with the project cost.2. Classification of Interest Income as 'Income from Other Sources' under Section 56 of the Income Tax Act, 1961:The Assessing Officer (A.O.) contended that the interest income earned on fixed deposits should be classified as 'Income from Other Sources' under Section 56 of the Income Tax Act, 1961. The A.O. relied on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, where it was held that interest income earned on surplus funds temporarily invested in fixed deposits is taxable as 'Income from Other Sources.'3. Applicability of the Supreme Court Decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT:The A.O. argued that the facts of the present case were similar to the Tuticorin Alkali Chemicals case, where the Supreme Court ruled that interest income earned on surplus funds is taxable under 'Income from Other Sources.' However, the petitioner company contended that the funds were not surplus but were temporarily parked to maintain liquidity for the construction of the power plant, thus the interest income should be capitalized.4. Relevance of the Decision in CIT vs. Bokaro Steel Ltd. and NTPC SAIL Power Co. (P) Ltd. vs. CIT:The First Appellate Authority applied the decision of the Supreme Court in CIT vs. Bokaro Steel Ltd. and the Delhi High Court in NTPC SAIL Power Co. (P) Ltd. vs. CIT. In these cases, it was held that interest income earned on funds temporarily parked during the construction phase is inextricably linked to the setting up of the project and should be treated as capital receipts, reducing the cost of the project.Analysis and Conclusion:The Tribunal upheld the decision of the First Appellate Authority, which had ruled in favor of the petitioner company. The Tribunal noted that the facts of the current year were identical to those of the previous year, where the E Bench of the Tribunal had dismissed the Revenue's appeal. The Tribunal found that the interest income was inextricably linked with the setting up of the power plant and should be capitalized, thus not taxable as 'Income from Other Sources.'The Tribunal also distinguished the present case from the Tuticorin Alkali Chemicals case, emphasizing that there was no finding of surplus funds in the present case. The funds were temporarily parked to maintain liquidity for the construction of the power plant, and the interest income earned was used to reduce the incidental expenses of the project.Final Judgment:The Tribunal dismissed the Revenue's appeal, upholding the order of the First Appellate Authority and ruling that the interest income earned on fixed deposits during the construction phase should be capitalized and not taxed as 'Income from Other Sources.' The appeal by the Revenue was dismissed, and the order was pronounced in the Open Court on 24th June, 2015.