2008 (10) TMI 264 - AT - Income Tax

Appeals allowed: Reimbursement of advance tax deleted, interest on margin money upheld

The Tribunal allowed the appeals filed by both the assessee and the Revenue. The addition of Rs. 4,25,000 towards reimbursement of advance tax was ... Addition Issues Involved:1. Taxability of reimbursement of advance tax from AP Transco.2. Taxability of interest earned on margin money kept for providing bank guarantees.Issue-wise Detailed Analysis:1. Taxability of Reimbursement of Advance Tax from AP Transco:The assessee, a private limited company engaged in the business of power generation, contended that the reimbursement of advance tax from AP Transco should not be taxed for the assessment year 1999-2000. The assessee argued that as per the Power Purchase Agreement (PPA) with APSEB, the reimbursement of taxes would commence only after the start of commercial production, which began on 25th Oct 2000, relevant to the assessment year 2001-02. The assessee further stated that no claim for reimbursement was made or received during the assessment year 1999-2000. The Assessing Officer (AO) disagreed and added the advance tax amount of Rs. 4,25,000 to the income of the assessee, which was upheld by the CIT(A).Upon appeal, it was found that during the relevant assessment year, the power plant was under construction and no income from the project was realized. The clause 3.8 of the PPA specified that the tax to be reimbursed would be calculated on the income from the project only. Since there was no project income and no reimbursement claim was made, the Tribunal concluded that the addition of Rs. 4,25,000 was not sustainable and deleted it.2. Taxability of Interest Earned on Margin Money Kept for Providing Bank Guarantees:The AO noted that the assessee earned interest of Rs. 25,83,348 on margin money kept for providing bank guarantees to APSEB and added this amount to the income of the assessee under the head 'Income from other sources.' The assessee argued that the margin money was kept as a contractual obligation and the interest earned was incidental to the business, not intended for earning interest. The CIT(A) deleted the addition, holding that the reassessment proceedings were not valid.The Tribunal examined whether the AO could assess the interest income in the reassessment proceedings initiated for a different reason. It was noted that during the original assessment, the AO had raised a specific query regarding the taxability of interest income, which the assessee had explained. The reassessment proceedings were initiated to tax the reimbursement of income-tax from AP Transco, not the interest income. However, during reassessment, the AO noticed the interest income and added it to the income of the assessee.The Tribunal referred to various judgments, including the Supreme Court's decision in Kalyanji Mavji & Co. vs. CIT, which allowed the AO to reassess any escaped income noticed during reassessment proceedings. It was held that the interest income on margin money was taxable under 'Income from other sources' and the AO was justified in adding it during reassessment. The Tribunal reversed the CIT(A)'s order and restored the AO's addition of Rs. 25,83,348.Conclusion:The appeals filed by both the assessee and the Revenue were allowed. The Tribunal deleted the addition of Rs. 4,25,000 towards reimbursement of advance tax and upheld the addition of Rs. 25,83,348 towards interest earned on margin money.