2020 (12) TMI 441 - AT - Income Tax

Tribunal rules on interest income, royalty, and labor welfare cess, citing case law.

The Joint Commissioner of Income Tax, Circle-4 (1) (1) and Ors. Versus Karnataka Road Development Corporation Ltd. and Ors.

The Joint Commissioner of Income Tax, Circle-4 (1) (1) and Ors. Versus Karnataka Road Development Corporation Ltd. and Ors. - TMI Issues Involved:1. Interest earned on temporary deployment of HUDCO loan funds.2. Interest on grants received from the Government of Karnataka set off against advances recoverable from contractors.3. Interest earned from mobilization advance given to contractors.4. Royalty and labor welfare cess disallowed under section 43B.Issue-wise Detailed Analysis:Issue I: Interest Earned on Temporary Deployment of HUDCO Loan FundsThe assessee availed loans from HUDCO for constructing bridges and temporarily invested the loan amounts in fixed deposits, earning interest. The Assessing Officer (AO) treated this interest as taxable income under 'Income from Other Sources,' disallowing the assessee's claim to reduce the interest income from the cost of assets. The CIT(A) upheld the AO's decision. However, the Tribunal referred to its previous decision in the assessee's own case for the assessment year 2005-06, where it allowed the alternate plea that the entire interest paid on loans from HUDCO should be allowed as revenue expenditure. Consequently, the Tribunal directed that the interest paid on HUDCO loans be treated as revenue expenditure, partially allowing the assessee's appeal.Issue II: Interest on Grants Received from Government of Karnataka Set Off Against Advances Recoverable from ContractorsThe assessee received specific grants from the Government of Karnataka for infrastructure projects and temporarily parked these funds in fixed deposits, earning interest. The AO treated this interest as taxable income, relying on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. The CIT(A) observed that the interest belonged to the Government of Karnataka and not the assessee, and allowed the set-off against the interest income. The Tribunal upheld the CIT(A)'s decision, relying on the Karnataka High Court's rulings in similar cases, which held that such interest income is not taxable as it is inextricably linked with the grants and the original purpose of the funds. The Tribunal dismissed the revenue's appeal.Issue III: Interest Earned from Mobilization Advance Given to ContractorsThe assessee earned interest on mobilization advances given to contractors, which was set off against the capital work in progress. The AO added this interest as taxable income, but the CIT(A) held that the interest earned from mobilization advances was part of the normal business activity and should reduce the capital work in progress. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Bokaro Steel Ltd., which held that interest earned on advances made to contractors for facilitating construction activities should be treated as capital receipts and not taxable income. The Tribunal dismissed the revenue's appeal on this issue.Issue IV: Royalty and Labor Welfare Cess Disallowed Under Section 43BThe AO disallowed the royalty and labor welfare cess payments not made to the Government of Karnataka, treating them as revenue expenses. The CIT(A) deleted the addition, noting that these payments were related to capital works and not debited to the profit and loss account. The Tribunal remanded the issue back to the AO for verification, directing that the payments should be allowed in the assessment year when they were actually made. The Tribunal allowed the grounds for statistical purposes and remanded the issue for verification.Conclusion:The Tribunal's judgment provided a detailed analysis of each issue, referencing relevant case laws and previous decisions to uphold or dismiss the appeals. The Tribunal partly allowed the assessee's appeals on the interest earned on HUDCO loan funds and dismissed the revenue's appeals on the interest on grants and mobilization advances. The issue of royalty and labor welfare cess was remanded back to the AO for verification. The cross objections filed by the assessee were dismissed as infructuous.