Interest earned on ADB loan not taxable as 'income from other sources'

The Tribunal allowed the appeals, holding that the interest earned on the ADB loan parked in fixed deposits was not taxable as 'income from other sources'. The delay in filing the appeal was condoned as it was inadvertent and rectified promptly. The Tribunal distinguished the current case from preceding years, aligning it with the decision in H.P. Power Corporation Ltd. where similar interest income was not taxed.

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Issues Involved:
1. Condonation of delay in filing the appeal.
2. Treatment of interest earned on fixed deposits made out of funds prior to commencement of business as 'revenue or capital'.

Detailed Analysis:

Condonation of Delay in Filing the Appeal:

The appellant faced a delay of 175 days in filing the appeals due to depositing the appeal fees under the wrong head. The appellant rectified this by depositing the fees again under the correct head. The Tribunal verified the facts and found them correct. It was noted that the original appeal was filed within the limitation period, and the delay was only due to rectifying the defect. The delay was neither willful nor intentional. The Ld. DR did not object to the condonation of the delay. The Tribunal held that there was no delay in filing the appeal since the rectification of the defect legitimatized the appeal filed on the original date. Even if there was any delay, it was inadvertent and deserves to be condoned, which was accordingly done in open court.

Treatment of Interest Earned on Fixed Deposits:

The solitary issue raised in both appeals was the treatment of interest earned on fixed deposits made out of funds prior to the commencement of business, whether it should be considered 'revenue or capital'. The assessee argued that the interest accrued should be set off against the capital work in progress and not be treated as income. The AO assessed the interest as 'income from other sources', relying on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT. The Ld. CIT(A) upheld the AO's order, stating that no distinguishing facts were pointed out from the preceding years where the issue was decided against the assessee by the ITAT.

The assessee contended that certain facts distinguished the current case from the preceding years and aligned it with the ITAT's decision in the case of H.P. Power Corporation Ltd., where the interest earned on borrowed funds parked in temporary investments due to project delays was not taxed. The Tribunal noted that the assessee had borrowed project-specific funds from ADB, which were parked in FDRs due to delays in project execution, earning interest. These facts were identical to those in the case of H.P. Power Corporation Ltd.

The Tribunal distinguished the current year from the preceding year, where the interest was primarily earned on surplus funds. In the current year, a substantial portion of interest income was earned from specific purpose loan funds (ADB loans). The Tribunal agreed with the assessee that the issue was covered by the ITAT's decision in H.P. Power Corporation Ltd., where interest earned on specific purpose funds parked in FDRs was not taxable. The Tribunal held that the interest received from ADB loan parked in FDRs was not revenue in nature and not liable to be taxed under 'income from other sources'.

Conclusion:

The appeals were allowed, and the interest earned on ADB loan parked in FDRs was held not taxable as 'income from other sources'.

Order Pronounced on 24th June, 2021.

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