Project-linked interest on temporary deposits treated as capital receipt, not taxable as income from other sources.

Interest earned on temporary bank deposits from share capital funds placed for a coal block project retained a capital character because the funds were received for a specific project, were subject to statutory and administrative constraints, and were not surplus monies available for free commercial use. As the deposits were incidental to the setting up of the project and inextricably linked with land acquisition, clearances and other pre-operative activities, the receipt was treated as adjustible against project cost and pre-operative expenses rather than as independent revenue income. The addition as income from other sources was deleted.

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Issues: Whether interest earned on temporary bank deposits out of share capital funds, pending land acquisition and other project-related expenditure for a coal block project, is taxable as income from other sources or is a capital receipt to be adjusted against pre-operative expenses.

Analysis: The interest was earned on funds received as equity contribution for a specific project and the record showed that the assessee was under statutory and administrative constraints to utilise the funds for land acquisition, clearances and implementation of the coal block project. The funds were not surplus monies available for free commercial deployment; they were retained to meet imminent project liabilities. On the facts, the deposits were incidental to and inextricably linked with the setting up of the project, so the receipt retained a capital character. The receipt could therefore be adjusted against the cost of the project and pre-operative expenses rather than taxed as independent revenue income.

Conclusion: The interest income was held to be a capital receipt, not taxable as income from other sources, and the addition made by the Assessing Officer was rightly deleted.

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