Tax Tribunal: Interest on STR set off against pre-op expenditure, not taxed as income. Addition deleted to prevent double taxation.

The Tribunal ruled that the interest earned on short-term receipts (STR) prior to commercial operations should be set off against pre-operative expenditure and not taxed as "income from other sources." The Tribunal also directed the deletion of the addition of Rs. 1,64,07,481 to prevent double taxation. The issue regarding depreciation on the road and amortization of cost was dismissed. The decision was issued on 11/08/2016.

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Issues Involved:
1. Treatment of interest earned on short-term receipts (STR) prior to commercial operations of the roads.
2. Double taxation of interest income of Rs. 1,64,07,481.
3. Depreciation on road and amortization of cost based on the concession period.

Issue-wise Detailed Analysis:

1. Treatment of Interest Earned on Short-term Receipts (STR):
The primary issue is whether the interest earned on STR prior to the commercial operations of the roads should be considered as "income from other sources" or should be reduced from the capital cost of construction. The appellant argued that the interest income is inextricably linked to the setting up of the project and should be reduced from the total expenditure incurred, which is treated as preoperative expenses and capitalized on commencement of commercial operations. The Assessing Officer (AO) and the CIT(A) disagreed, treating the interest income as taxable under "income from other sources," citing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which states that interest income generated prior to the commencement of business should be taxed as income from other sources unless there is a diversion of income by overriding title. The Tribunal, however, found the facts of the case more aligned with the Supreme Court's decision in CIT vs. Bokaro Steel Ltd., where interest income earned during the setting up of the project was considered inextricably linked to the project and thus treated as a capital receipt. The Tribunal concluded that the interest earned on borrowed funds, which were inextricably linked to the setting up of the mega road projects, should be set off against pre-operative expenditure and not taxed as income from other sources.

2. Double Taxation of Interest Income of Rs. 1,64,07,481:
The appellant contended that the interest income of Rs. 1,64,07,481 was taxed twice. The CIT(A) upheld the AO's decision to treat the interest income as taxable under "income from other sources," despite the fact that the interest income had already been credited in the profit and loss account by reducing it from the overall interest expenditure. The Tribunal agreed with the appellant, noting that the interest income had already been offered in the profit and loss account, and thus, taxing it again would result in double taxation. Consequently, the Tribunal directed the deletion of the addition of Rs. 1,64,07,481.

3. Depreciation on Road and Amortization of Cost:
The appellant did not press this ground during the hearing, and thus, the Tribunal dismissed it as not pressed.

Conclusion:
The Tribunal allowed the appeal partly by ruling that the interest earned on STR prior to commercial operations should be set off against pre-operative expenditure and not taxed as "income from other sources." Additionally, it directed the deletion of the addition of Rs. 1,64,07,481 to avoid double taxation. The ground regarding depreciation on the road and amortization of cost was dismissed as not pressed. The order was pronounced on 11/08/2016.

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