Tribunal rules interest during construction as capital receipt, not revenue income

The Tribunal allowed the appeals for both Assessment Years 2009-10 and 2010-11, overturning the decision of the Assessing Officer and CIT(A). It held that the interest received during the construction period should be treated as a capital receipt, not revenue income. The Tribunal found that the interest earned was directly linked to the ongoing construction activities and equity contributions for plant establishment, not from surplus funds. Therefore, the interest income was set off against pre-operative expenses, as it was related to specific purposes like setting up power plants.

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Issues:
- Treatment of interest received during construction period as income from other sources instead of capital receipt

Analysis:
1. The appeals were filed against the orders passed by CIT(A)-Allahabad confirming the addition of interest received during the construction period as income from other sources. The grounds of appeal for the Assessment Year 2009-10 highlighted that the interest received was linked to plant set-up activities and should be considered a capital receipt, not revenue income. The company had not commenced any business activities and the funds received were solely for setting up the plant, which was being utilized accordingly. The Assessing Officer treated the interest received as revenue income under section 143(3) of the Income Tax Act.

2. For the Assessment Year 2010-11, a similar treatment was given by the Assessing Officer to the interest received, considering it as income from other sources. The company contended that the funds were not borrowed but equity contributions for plant establishment, and thus, should be treated as capital receipts, not taxable income.

3. The CIT(A) upheld the Assessing Officer's order, stating that the interest earned on the funds was not directly linked to the construction and acquisition activities. The appellant's reliance on the decision of the Hon'ble Supreme Court in CIT Vs. Bokaro Steel Ltd. was considered but found insufficient to establish the link between the interest earned and the plant infrastructure. The CIT(A) also emphasized that until the business activities commenced, income from various sources could be taxable, including interest earned on surplus funds.

4. The appellant argued that the interest income should be set off against pre-operative expenses, citing relevant judgments such as the case of Adani Power Ltd Vs. ACIT and the judgment of Allahabad High Court in CIT Vs. Indo-Gulf Fertilizers & Chemicals. The appellant contended that the interest income was related to specific purposes like setting up power plants and should not be considered income from other sources.

5. The Tribunal concluded that the interest earned was not from surplus funds but equity contributions for plant establishment, which were used for ongoing construction activities. The funds were kept liquid for operational needs, and the interest earned was inextricably linked to construction and acquisition activities. The Tribunal found that the Assessing Officer and CIT(A) overlooked these aspects and wrongly categorized the interest income as revenue instead of capital receipt. Therefore, the appeals of the assessee were allowed for both Assessment Years 2009-10 and 2010-11.

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