ITAT rules interest on fixed deposits pre-operative period not taxable income

DCIT, Corporate Circle-1 (2), Bhubaneswar Versus M/s Radhikapur (West) Coal Mining Private Limited

DCIT, Corporate Circle-1 (2), Bhubaneswar Versus M/s Radhikapur (West) Coal Mining Private Limited - TMI Issues Involved:

1. Deletion of addition made under Section 56 of the Income Tax Act by the Assessing Officer (AO) for the assessment years 2013-2014 and 2014-2015.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 56:

The sole issue agitated by the assessee in both the appeals is against the deletion of the addition by the CIT(A) made under Section 56 of the Income Tax Act by the AO of Rs. 2,16,06,733/- for A.Y. 2013-2014 and Rs. 1,58,81,730/- for A.Y. 2014-2015.

Facts of the Case:

The assessee company, a joint venture (JV) named Radhikapur (West) Coal Mining Private Limited, was incorporated under the Companies Act, 1956. The JV was formed to develop the Radhikapur (West) coal block, with the mining lease to be obtained in the name of the JV company. During the assessment years under consideration, the assessee filed returns showing Nil income. The case was selected for scrutiny, and it was noticed that the assessee had earned interest on fixed deposits (FD) amounting to Rs. 2,16,06,733/- for A.Y. 2013-2014 and Rs. 1,58,81,730/- for A.Y. 2014-2015. The AO issued a show cause notice to the assessee as to why this income should not be added to the total income under Section 56 of the Act.

Assessee's Argument:

The assessee argued that the interest earned on FDs was made out of share application money or share capital, which was "inextricably linked" with the development of the coal block. Hence, it was related to the development of the coal block and could not be treated as income from other sources. The interest earned was in the nature of capital receipt and liable to be set off against pre-operative expenses.

Assessing Officer's Decision:

The AO was not satisfied with the assessee's explanation and added the interest income to the total income under Section 56 of the Act for both assessment years.

CIT(A)'s Decision:

The assessee appealed before the CIT(A), who, after considering the submissions and relying on certain case laws, deleted the additions made by the AO for both assessment years.

Revenue's Appeal:

The Revenue appealed against the CIT(A)'s order before the Income Tax Appellate Tribunal (ITAT). The Revenue argued that the interest income on fixed deposits should be taxed under the head "income from other sources" as per Section 56(2) of the Act. The Revenue relied on the decisions of the Hon'ble Madras High Court in CIT Vs. Seshasayee Paper & Boards Ltd. and the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd.

Assessee's Counter-Argument:

The assessee reiterated the submissions made before the CIT(A) and relied on the CIT(A)'s order. The assessee also provided a written synopsis detailing the allocation and de-allocation of the coal block and the various pre-operative activities undertaken. The assessee argued that the interest earned during the pre-operative period should be treated as a capital receipt and set off against project development expenditure.

ITAT's Analysis:

After hearing both sides and reviewing the materials on record, the ITAT noted that the CIT(A) had deleted the addition by relying on the decision of the Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. Vs. ITO and the decision of the ITAT Cuttack Bench in POSCO-India (P) Ltd. The CIT(A) observed that the interest earned on FDs during the pre-operative period was a capital receipt and should be set off against pre-operative expenses, not taxed as income from other sources.

The ITAT upheld the CIT(A)'s order, stating that the AO's action to tax the interest income was not backed by a speaking order. The ITAT found that the case was squarely covered by the decision of the Hon'ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. and the ITAT Cuttack Bench in POSCO-India (P) Ltd. The ITAT also referenced the decision of the Hon'ble Supreme Court in CIT Vs. Vegetable Products, which favored the assessee when two reasonable constructions of a taxing provision were possible.

Conclusion:

The ITAT upheld the CIT(A)'s order, dismissing the Revenue's appeals. The interest earned on fixed deposits during the pre-operative period was considered a capital receipt and set off against pre-operative expenses, not taxable as income from other sources.

Judgment:

In the result, both appeals of the Revenue are dismissed. Order pronounced in the open court on 21/10/2019.