Treatment of Interest on FDRs for Hotel Setup as Capital Receipts

The Tribunal held that interest earned on funds temporarily parked in FDRs, linked to setting up a hotel, should be treated as capital receipts and set off against capital expenditure. The Tribunal overturned the CIT(A)'s decision and allowed the appeal of the assessee for Assessment Year 2013-14, based on consistency with a previous ruling for Assessment Year 2012-13.

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Issues:
1. Classification of interest earned on FDRs as "income from other sources" for Assessment Year 2013-14.

Detailed Analysis:
The appellant, a company running a five-star hotel in Goa, had its hotel under construction during the relevant year. The appellant had taken an ECB for funding the construction, which was parked in FDRs. The Assessing Officer observed that interest earned on FDRs was not shown as income under "Income from Other Sources" as per Section 56 of the Income Tax Act, despite the appellant receiving interest as per 26AS. Consequently, an addition of the interest amount was made. The CIT(A) dismissed the appeal filed by the assessee.

In a previous year (Assessment Year 2012-13), a similar issue arose, and the Tribunal decided in favor of the assessee. The Tribunal held that interest earned on funds temporarily parked in FDRs, linked to setting up a hotel, should be treated as capital receipts and set off against capital expenditure. The Tribunal cited judicial precedents to support this position. The Tribunal emphasized that if funds are raised for setting up a plant or acquiring a capital asset, and the interest earned on such funds parked in FDRs is inextricably linked with the plant's activities, it should be considered a capital receipt, not income from other sources.

Based on the principles established in earlier judgments, the Tribunal held that the interest earned on FDRs during the period, which was netted off against interest paid, should be treated as capital receipts linked to setting up the hotel. The Tribunal overturned the CIT(A)'s decision, emphasizing consistency with the earlier ruling for Assessment Year 2012-13. Consequently, the appeal of the assessee was allowed.

In conclusion, the Tribunal's decision reiterated that interest earned on funds parked in FDRs, when linked to setting up a plant or acquiring a capital asset, should be treated as capital receipts and set off against capital expenditure. The judgment emphasized consistency with previous rulings and upheld the appeal of the assessee for the Assessment Year 2013-14.

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