2019 (11) TMI 1653 - AT - Income Tax

Treatment of Interest on FDRs as Capital Receipt in Construction Expenses

The Tribunal held that the interest earned on Fixed Deposit Receipts (FDRs) linked to the hotel's construction should be treated as a capital receipt and ... Capitalization of interest on FDRs earned during the period of construction - interest earned on funds temporarily parked in FDRs - capital receipts set off against the capital expenditure - HELD THAT:- The entire ECB loan was disbursed in a single trench in the year under consideration and till this year, the assessee could utilize only ₹ 33.70 crores and was considered in the capital WIP. The assessee has temporarily parked the ECB loan in FDRs till utilization for fixed asset/capital expenditure strictly in compliance with the RBI instruction. The assessee had paid interest amount of ₹ 13.38 crores and has earned interest on FDRs of ₹ 4.03 crores. The net amount of interest of ₹ 9.35 crores has been added to the preoperative expenditure pending capitalization, i.e. in capital WIP. There is no quarrel that the interest paid on ECB loan has been capitalized. As decided in FACOR POWER LTD. [2016 (1) TMI 461 - DELHI HIGH COURT] NTPC SAIL POWER COMPANY PVT. LTD. [2012 (10) TMI 524 - DELHI HIGH COURT] if the funds have been raised for the purpose of setting up of a plant or acquisition of capital asset then the funds have to be inextricably linked with the activities of the plant and if such funds have been put in FDRs, then interest received will be a capital receipt and cannot be taxed as income from other sources. Thus we hold that once the ECB loan which is to be utilized for capital expenditure only, then, any interest earned on funds temporarily parked in FDRs is inextricably linked with the setting up of hotel of the assessee, which is to be held as capital receipts only and is permitted to be set off against the capital expenditure. The decision of CIT (A) is in line with the judicial precedence and therefore, the impugned order of the ld. CIT (A) is upheld. Consequently, the appeal of the Revenue is dismissed. Issues Involved:1. Capitalization of interest on FDRs earned during the period of construction.2. Taxability of interest income earned on ECB loans parked in FDRs before commencement of business.3. Application of judicial precedents related to interest income and capital receipts.Detailed Analysis:1. Capitalization of Interest on FDRs Earned During the Period of Construction:The primary issue was whether the interest earned on Fixed Deposit Receipts (FDRs) during the construction period should be capitalized. The assessee company was in the process of constructing a hotel and had acquired an existing hotel under the SARFEASI Act. The company raised a foreign currency ECB loan of approximately Rs. 82.37 crores from Axis Bank, Hong Kong, for renovation and refurbishment. The loan amount was parked in FDRs pending utilization. The interest earned on these FDRs (Rs. 4.03 crores) was netted off against the interest paid on the loan (Rs. 13.38 crores), resulting in a net interest of Rs. 9.35 crores, which was added to the preoperative expenses pending capitalization.2. Taxability of Interest Income Earned on ECB Loans Parked in FDRs Before Commencement of Business:The Assessing Officer held that since the assessee had not commenced any business operations, the interest income earned on the ECB loans parked in FDRs should be assessed as 'income from other sources.' This decision was based on the Supreme Court's ruling in Tuticorin Alkali Chemicals and Fertilizers Ltd., which stated that interest earned on surplus funds before the commencement of business is taxable as income from other sources. However, the assessee argued that the funds were inextricably linked with the setting up of the hotel and thus should be treated as a capital receipt.3. Application of Judicial Precedents Related to Interest Income and Capital Receipts:The CIT(A) and the Tribunal relied on several judicial precedents, including the Supreme Court's rulings in CIT vs. Bokaro Steel Ltd., CIT vs. Karnal Cooperative Sugar Mills Ltd., and CIT vs. Karnataka Power Corporation. These cases established that income received from funds inextricably linked with the acquisition of capital assets is a capital receipt. The Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. further supported this view, stating that interest earned on funds temporarily parked in FDRs, which are inextricably linked to the setting up of a business, should be capitalized and set off against pre-operative expenses.The Tribunal concluded that the ECB loan was raised for the acquisition of a capital asset and renovation of the hotel. The funds were temporarily parked in FDRs in compliance with RBI instructions, and the interest earned was inextricably linked with the setting up of the hotel. Therefore, the interest income should be treated as a capital receipt, not as income from other sources. The Tribunal upheld the CIT(A)'s decision, which was in line with judicial precedents, and dismissed the Revenue's appeal.Conclusion:The Tribunal held that the interest earned on FDRs, which were inextricably linked with the setting up of the hotel, should be treated as a capital receipt and set off against pre-operative expenses. The decision of the CIT(A) was upheld, and the Revenue's appeal was dismissed.