2016 (3) TMI 49 - AT - Income Tax

Interest income linked to power plant construction is capital, not taxable; Tribunal dismisses Revenue's appeal

A.C.I.T., Circle 13 (1), New Delhi Versus NTPC Tamil Nadu Energy Co. Ltd.

The Tribunal upheld the CIT(A)'s decision, ruling that the interest income was linked to the construction of a power plant and should be capitalized, not ... Interest on deposits with Indian Banks and others - disallowance of capitalization of interest - Treated as Income from other sources - Held that:- In view of the factual and legal positions in the instant AY 2010-11 since the work of construction of the power plant was under progress, interest incomes are also inextricably linked with the setting up of the power plant and such incomes have gone on to reduce the expenses for setting up of the plant and as there was no surplus funds available with the appellant company, therefore, such income is required to be capitalized to be set off against the pre operative expenses. As such the A.O. is not justified in adding the sum as income from other source u/s 56 - Decided in favour of assessee Issues Involved:1. Deletion of addition of Rs. 1,75,74,129/- including interest on deposits with Indian Banks and others.2. Applicability of Section 5(1) of the Income Tax Act concerning total income of a resident.3. Non-acceptance of Assessing Officer's plea from other sources under Section 56 of the Income Tax Act, 1961.4. Taxability of interest earned on fixed deposits.5. Taxability of interest on surplus amounts under the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deletion of Addition of Rs. 1,75,74,129/- Including Interest on Deposits with Indian Banks and Others:The Revenue appealed against the deletion of the addition made by the Assessing Officer (AO) concerning interest income of Rs. 1,75,74,129/-, which included Rs. 1,74,71,389/- earned from mobilization advances to contractors and Rs. 1,02,740/- from temporary parking of funds in banks. The AO had categorized this income under 'income from other sources' and disallowed its capitalization. However, the CIT(A) deleted the additions, leading to the Revenue's appeal.2. Applicability of Section 5(1) of the Income Tax Act Concerning Total Income of a Resident:The Revenue contended that the CIT(A) failed to appreciate the provisions of Section 5(1) of the Income Tax Act, which includes all income from whatever source derived in the total income of a resident. The AO relied on the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, where surplus funds deposited in banks to earn interest were deemed taxable as income from other sources.3. Non-acceptance of Assessing Officer's Plea from Other Sources under Section 56 of the Income Tax Act, 1961:The AO argued that the interest income should be taxed under Section 56 of the Income Tax Act, as it was not related to the primary business activities but was earned from surplus funds. However, the CIT(A) and the Tribunal found that the interest income was inextricably linked to the construction of the power plant and thus should be capitalized, not taxed as income from other sources.4. Taxability of Interest Earned on Fixed Deposits:The AO asserted that interest earned on fixed deposits is income and should be taxed accordingly. The CIT(A) disagreed, stating that the interest earned was from funds temporarily parked in banks to maintain liquidity and reduce construction costs, thus being directly linked to the project setup. This view was supported by precedents like the Supreme Court judgment in CIT v. Bokaro Steel Ltd., where similar interest incomes were considered capital receipts reducing the cost of construction.5. Taxability of Interest on Surplus Amounts under the Income Tax Act, 1961:The Revenue argued that the interest on surplus amounts should be taxable. However, the CIT(A) found no evidence that the funds were surplus. Instead, they were part of the ongoing construction activities, and the interest earned was used to reduce the project costs. The Tribunal upheld this view, citing the Delhi High Court judgment in Indian Oil Panipat Power Consortium Ltd. v. ITO, which distinguished between surplus funds and funds inextricably linked to project setup.Conclusion:The Tribunal upheld the CIT(A)'s decision, agreeing that the interest income was inextricably linked to the construction of the power plant and should be capitalized. The appeal by the Revenue was dismissed, affirming that the interest income was not taxable as income from other sources under Section 56 but should reduce the cost of the project. The judgment emphasized the importance of the linkage between the interest income and the project setup, distinguishing it from cases where interest on surplus funds was taxable.