Project receipts during construction: interest income remained taxable, while incidental receipts reduced project cost.

Interest earned during the formative period of a project was held taxable because it was treated as independent income from investments, and the prior rule on such interest remained applicable. By contrast, receipts from house property, guest house, equipment charges, and recoveries from contractors for water and electricity supplied during construction were held directly connected with the setting up of the plant; they were not taxable revenue income and had to be adjusted against project cost. The appeal succeeded only in part, with the interest issue decided against the assessee and the remaining receipts treated as capital in character.

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Issues: (i) Whether interest income earned during the formative period of the project was taxable income. (ii) Whether receipts from house property, guest house, equipment charges, and recoveries from contractors on account of water and electricity supply were taxable or were required to be adjusted against the project cost.

Issue (i): Whether interest income earned during the formative period of the project was taxable income.

Analysis: The question on interest income was governed by the distinction drawn in earlier decisions between independent income earned from investments and receipts that are directly connected with or incidental to the construction of the plant. The prior ruling treating interest earned during the formative period as taxable remained applicable to such interest income.

Conclusion: The interest income was taxable and this issue was decided against the assessee.

Issue (ii): Whether receipts from house property, guest house, equipment charges, and recoveries from contractors on account of water and electricity supply were taxable or were required to be adjusted against the project cost.

Analysis: These receipts were directly connected with the construction activity and fell within the principle that receipts incidental to the setting up of the project are not taxable as revenue income but go to reduce the project cost. The governing legal position applied the rule recognised in the decisions concerning receipts incidental to construction work.

Conclusion: These receipts were to be adjusted against the project cost and were not taxable income, which was in favour of the assessee.

Final Conclusion: The appeal succeeded in part: the ruling on interest income remained undisturbed, while the other receipts were held to be capital in character and to reduce the project cost.

Ratio Decidendi: Receipts that are directly connected with or incidental to the construction of a plant during its formative period are not taxable income and must be adjusted against project cost, whereas independent interest income earned from investments remains taxable.

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