2009 (6) TMI 27 - HC - Income Tax

Court affirms deductions on interest income & rent as capital receipts for construction activities (iii)

The Commissioner of Income Tax, Dehradun Versus Tehri Hydro Development Corporation

The court upheld the I.T.A.T.'s decision to allow deductions on interest income and treat rent received as capital receipts for a government enterprise ... Deduction u/s 57(iii) - deduction of administrative cost from interest income - held that deduction is allowable on percentage basis of interest income Issues Involved:1. Whether the I.T.A.T. erred in deleting the addition of 2.5% on income earned as interest by the respondent under Section 57(iii) of the Income Tax Act, 1961Rs.2. Whether the C.I.T. (A) and I.T.A.T. erred in accepting rent and interest received from employees and oustees in Dam area as capital receipts and excluding them from taxabilityRs.Analysis:Issue 1:The appeals involved questions regarding the deletion of 2.5% addition on interest income by the I.T.A.T. under Section 57(iii) of the Income Tax Act, 1961. The respondent, a government enterprise engaged in construction activities, claimed deductions on interest income and rent received from employees and oustees in the Dam area. The Assessing Officer disallowed these deductions, leading to appeals before the C.I.T. (A) and subsequently the I.T.A.T. The I.T.A.T. allowed the deductions under Section 57(iii), which the revenue challenged in the appeals. The court analyzed that the interest income and receipts from oustees fell under the head of 'income from other sources' and were permissible for deductions under Section 57(iii) if expended wholly and exclusively for earning such income. The court noted that the receipts were treated as capital receipts due to the construction nature of the respondent's activities, and thus, the deductions were rightly allowed by the I.T.A.T.Issue 2:The court referred to precedents like Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT and Commissioner of Income Tax v. Bokaro Steel Ltd. to support its decision. In the Bokaro Steel Ltd. case, the apex court held that certain receipts connected to construction activities could be treated as capital receipts set off against capital expenditure. The court found that the interest and rent received by the respondent were akin to capital receipts as the business activities had not commenced, and the construction process was ongoing. Consequently, the I.T.A.T.'s decision to allow deductions towards administrative costs on interest income and treat the interest and rent as capital receipts was upheld, as per the legal principles established in the Bokaro Steel Ltd. case.In conclusion, the court dismissed all three appeals, affirming the I.T.A.T.'s decision to allow deductions and treat the interest and rent receipts as capital receipts.