Court Dismisses Appeal on ITAT's Stance: Interest on FDRs During Construction Capitalized, Not Income-Taxable.

The High Court dismissed the appellant's challenge against the ITAT order, which allowed the capitalization of interest on FDRs during the construction period without adhering to RBI guidelines. The court determined that no substantial question of law arose, as the issues were already addressed in previous decisions by the Apex Court and High Court, including those involving Tuticorin Alkali Chemicals and Indian Oil Panipat Power Consortium. The court found that the interest earned on FDRs, linked to setting up plant and machinery, is of a capital nature and not taxable as income. Consequently, the appeal was dismissed, affirming the ITAT's decision.

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Issues:
Challenge to ITAT order allowing capitalization of interest on FDRs during construction period without following RBI guidelines.

Analysis:
The appellant challenged the ITAT order dated 29th November, 2019, regarding the capitalization of interest on Fixed Deposit Receipts (FDRs) earned during the construction period without adhering to RBI guidelines. The appellant argued that while utilizing External Commercial Borrowings (ECB) funds, the assessee did not comply with RBI guidelines. The appellant contended that the ITAT erred in not considering decisions of the Apex Court, including Tuticorin Alkali Chemicals and Fertilizers Limited vs CIT, (1997) 227 ITR 172 (SC).

The case involved the assessee obtaining a Foreign ECB loan of Rs. 82.37 crores for renovating a hotel acquired under the SARFEASI Act. During the relevant year, only Rs. 33.70 crores of the loan was utilized, with the remaining amount temporarily parked in FDRs in compliance with RBI instructions. The assessee paid Rs. 13.38 crores as interest and earned Rs. 4.03 crores on FDRs. The net interest amount of Rs. 9.35 crores was added to the preoperative expenditure pending capitalization.

The judgment in Tuticorin Alkali Chemicals was cited by the appellant but was subsequently explained by the Apex Court in Commissioner of Income Tax, Bihar II, Patna vs. Bokaro Steel Ltd., Bokaro, (1999) 1 SCC 645. The court held that amounts linked to setting up plant and machinery are of capital nature and cannot be taxed as income.

Furthermore, a Division Bench of the High Court in Indian Oil Panipat Power Consortium Limited, New Delhi vs. Income Tax Officer, (2009) 315 ITR 255 (Delhi) held that interest earned by the assessee linked to setting up of the plant cannot be treated as income from other sources. This principle was reiterated by the High Court in Principal Commissioner of Income Tax vs. Facor Power Ltd., (2016) 380 ITR 474 (Delhi).

Considering the precedents and legal principles, the High Court concluded that no substantial question of law arose for consideration as the issues raised were covered by decisions of the Apex Court and the High Court. Consequently, the appeal was dismissed.

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