Tribunal Orders Fresh Adjudication on Interest Income Classification for FDR and Flexi Deposits; Consistency Stressed.

The Tribunal remitted the case back to the AO for fresh adjudication, focusing on the classification of interest income on FDR and Flexi deposits as either revenue or capital receipts. It directed the AO to assess whether the interest income was used for revenue purposes or capital expenditure. The Tribunal upheld the CIT(A)'s decision regarding the treatment of interest on mobilization advances as capital receipts for the assessment year 2014-2015. It emphasized adherence to the principle of consistency only when circumstances remain unchanged and instructed the AO to provide the assessee a reasonable opportunity to be heard. Appeals were allowed for statistical purposes.

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Issues Involved:
1. Legality and arbitrariness of the AO's order.
2. Classification of interest on FDR and Flexi deposits as revenue receipt vs. capital receipt.
3. Treatment of interest on mobilization advance as capital receipt.
4. Consistency in the treatment of interest income across assessment years.

Detailed Analysis:

1. Legality and Arbitrariness of the AO's Order:
The assessee contended that the order of the AO was illegal, arbitrary, contrary to evidence on record, and without application of mind. The Tribunal did not explicitly address this issue separately but focused on the substantive issues regarding the classification of interest income.

2. Classification of Interest on FDR and Flexi Deposits:
The primary contention was whether the interest on Fixed Deposits (FDR) and Flexi deposits should be treated as revenue receipts or capital receipts. The AO treated the interest as revenue receipts and added it to the income. The CIT(A) upheld this view for the interest on FDR and Flexi deposits.

The assessee argued that the interest income was inextricably linked to the project and should be treated as a capital receipt. The Tribunal referred to various judicial precedents, including the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd. v. ITO, which held that interest earned on funds brought for business infusion could not be classified as income from other sources if the income was earned prior to the commencement of business.

The Tribunal also considered the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest on surplus funds should be treated as income from other sources. However, the Tribunal noted that the interest earned on funds inextricably linked to the setting up of a project should be capitalized and set off against pre-operative expenses, as held in Bokaro Steel Ltd.

The Tribunal remitted the matter back to the AO for fresh adjudication, directing the AO to examine whether the interest income was utilized for revenue purposes or capital expenditure and whether it should be treated as a capital receipt.

3. Treatment of Interest on Mobilization Advance:
For the assessment year 2014-2015, the CIT(A) deleted the addition regarding the interest on mobilization advance, accepting it as a capital receipt. The Tribunal did not find it necessary to adjudicate this issue further and dismissed this ground of appeal for the assessment year 2014-2015.

4. Consistency in Treatment of Interest Income:
The AO raised an issue regarding the consistency of the treatment of interest income across different assessment years. The assessee argued that the circumstances changed in the assessment years 2013-2014 and 2014-2015 due to significant infusion of funds through equity shares specifically for the project. The Tribunal agreed that the principle of consistency should be followed only when facts and circumstances remain the same. The Tribunal also noted that if there was an error in the past, it should not be perpetuated.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO for fresh adjudication. The AO was directed to examine the utilization of interest income, whether it was used for revenue purposes or capital expenditure, and to decide the issue as per law after providing a reasonable opportunity of being heard to the assessee. The Tribunal emphasized the need for the assessee to cooperate with the AO for early disposal of the case.

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