2019 (10) TMI 1262 - AT - Income Tax

ITAT rules interest income as capital receipt, not revenue. Implications for penalty proceedings under Section 271(1)(c).

The ITAT ruled in favor of the assessee, determining that the interest income of Rs. 21,36,598/- should be treated as a capital receipt rather than a ... Characterization of income - Interest Income - revenue or capital receipt - Process of Setting Up The Project Which Has Yet Not Commenced - assessee has earned interest income on temporary investment of same fund in FD till the utilization of the same funds in the project - HELD THAT:- The total interest income has been considered by the assessee as capital receipt which ought to have been inextricably linked with the process of setting up plant and machinery, such receipt will go to reduce the cost of its assets. The interest income has been reduced from CWIP project development cost of respective projects. In this regard, as relying on case of DCIT vs. Adani Power Ltd [2018 (6) TMI 1511 - ITAT AHMEDABAD]on identical issue and identical fact the ITAT Bench in the above cited case has decided the issue in favour of the assessee as held that since the income was earned in a period prior to commencement of business it was in the nature of capital receipt and hence was required to be set off against pre-operative expenses. - Decided in favour of assessee. Issues Involved:1. Treatment of Interest Income as Capital Receipt.2. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Treatment of Interest Income as Capital Receipt:The primary issue in this case revolves around whether the interest income of Rs. 21,36,598/- earned by the assessee should be treated as a capital receipt or a revenue receipt. The assessee argued that the interest income was 'inextricably linked with the process of setting up the project which has yet not commenced,' and thus should be treated as a capital receipt. The assessee relied on the Supreme Court decision in the case of Commissioner of Income Tax Vs. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) to support its claim.The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] did not accept this argument, treating the interest income as a revenue receipt. The AO issued a show cause notice to the assessee, referring to the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on surplus funds should be treated as 'income from other sources.'The assessee explained that it had borrowed funds for two projects: a 702 MW combined cycle power project and a 5 MW Solar Photovoltaic Power Project. The interest income of Rs. 21,36,319/- was earned on temporary investments of these borrowed funds. The assessee argued that this income should reduce the cost of the assets and be considered as capital receipt.Upon appeal, the ITAT considered the facts and previous decisions, including the Delhi High Court's interpretation in Indian Oil Panipat Power Consortium Ltd., which distinguished between surplus funds and funds inextricably linked to the setting up of a project. The ITAT concluded that the interest income earned was indeed inextricably linked to the setting up of the plant and machinery, and therefore, should be treated as a capital receipt. This decision was consistent with the ITAT's earlier ruling in the case of DCIT vs. Adani Power Ltd.2. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act, 1961:The second issue concerned the initiation of penalty proceedings under Section 271(1)(c) of the Act. The CIT(A) had stated that the 'initiation of penalty proceedings u/s. 271(1)(c) of the Act being premature is not entertained and is rejected.' The assessee contended that it had not furnished any inaccurate particulars or concealed any income, and that the additions were a result of a difference in interpretation of the law.The ITAT did not specifically address this issue in detail in the provided judgment, as the primary focus was on the treatment of the interest income. However, given the favorable decision on the first issue, the initiation of penalty proceedings under Section 271(1)(c) would likely be rendered moot, as the basis for the penalty (i.e., the treatment of the interest income) was resolved in favor of the assessee.Conclusion:The ITAT allowed the appeal of the assessee, ruling that the interest income of Rs. 21,36,598/- should be treated as a capital receipt, thereby reducing the cost of the assets and not being chargeable to tax as revenue receipt. The decision was based on the principle that the funds were inextricably linked to the setting up of the project, aligning with the precedent set by higher judicial authorities. The issue of penalty proceedings under Section 271(1)(c) was not specifically adjudicated, but the favorable ruling on the primary issue suggests that the penalty proceedings would not proceed.