Tribunal directs AO to reclassify interest as capital receipt & allow preliminary expenses claim.

The Tribunal allowed the appeal of the assessee, directing the AO to consider the interest of Rs. 23,31,717/- as part of the capital receipt and to allow the preliminary expenses claim of Rs. 8,97,700/-.

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Issues Involved:
1. Addition of Rs. 23,31,717/- as income from other sources.
2. Disallowance of Rs. 8,97,700/- being 1/5th of preliminary expenses.

Issue-wise Detailed Analysis:

1. Addition of Rs. 23,31,717/- as income from other sources:

The core issue revolves around the confirmation of an addition of Rs. 23,31,717/- by the CIT(A) from a total addition of Rs. 46,92,827/- made by the AO. The assessee contended that the interest accrued on FDRs is inextricably linked to the construction project and should be considered as a capital receipt deductible from the cost of the project. The CIT(A) partially accepted this argument but disallowed Rs. 23,31,717/-, treating it as income from other sources.

The Tribunal examined the facts and submissions, noting that the FDRs were purchased to provide letters of credit and bank guarantees for suppliers from abroad, directly linking the interest earned to the construction project. The Tribunal referenced the Delhi High Court judgment in Indian Oil Panipat Power Consortium Ltd, which held that interest earned on funds brought for a specific purpose before business commencement is a capital receipt and should be set off against pre-operative expenses.

The Tribunal concluded that the interest earned on FDRs is inextricably linked to the hotel project, and thus, the CIT(A)'s treatment of Rs. 23,31,717/- as income from other sources was erroneous. The Tribunal directed the AO to consider this interest as part of the capital receipt deductible from the project's cost.

2. Disallowance of Rs. 8,97,700/- being 1/5th of preliminary expenses:

The second issue pertains to the disallowance of Rs. 8,97,700/- by the CIT(A), which represents 1/5th of preliminary expenses amounting to Rs. 44,88,500/-. These expenses were incurred in the Assessment Year 2007-08 for ROC fees and were claimed as revenue expenditure. The AO disallowed this claim, but the CIT(A) allowed 1/5th of the expenses under section 35D of the Income Tax Act.

The CIT(A) in the current year did not find reasoning in the predecessor's decision and denied the claim for subsequent years. However, the Tribunal noted that once a claim is allowed in the initial assessment year, it cannot be denied in subsequent years on identical facts. Citing precedents from the Hon'ble Bombay High Court and the Supreme Court, the Tribunal directed the AO to allow the claim for the subsequent years.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to consider the interest of Rs. 23,31,717/- as part of the capital receipt and to allow the preliminary expenses claim of Rs. 8,97,700/-. The order was pronounced in the open court on 11.11.2022.

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