2025 (10) TMI 42 - AT - Income Tax

Interest on deposits linked to plant and machinery treated as capitalized cost, not taxable revenue

ITAT (DELHI - AT) held that interest earned on deposits directly linked to the acquisition of plant and machinery is incidental to asset acquisition and ... Treatment of interest income as capitalized by the Assessee - deposit of money linked with the purchase of plant and machinery HELD THAT:- Hon'ble Supreme Court in the case of Karnal Co-operative Sugar Mills Ltd [1999 (4) TMI 7 - SC ORDER] held that deposit of money is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited [1997 (7) TMI 4 - Supreme Court] will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd. [1998 (12) TMI 4 - Supreme Court]The appeal is dismissed. Appeal of the Assessee is allowed. Assessee capitalized net interest (interest expense less interest income) related to a term loan for development of a solar power plant as part of capital work in progress (CWIP) in audited FY 2017-18, having netted interest earned on bank deposits up to 31-03-2018. Ld. CIT(A)/NFAC disallowed and confirmed addition of Rs. 2,03,54,362/-. Relying on precedent, the Tribunal held the issue not res integra and followed the ratio of the Hon'ble Supreme Court in Commissioner of Income-tax v. Karnal Co-operative Sugar Mills Ltd., stating: 'In the present case, the assessee had deposited money to open a letter of credit for the purchase of the machinery required for setting up its plant in terms of the assessee's agreement with the supplier. It was on the money so deposited that some interest has been earned. This is, therefore, not a case where any surplus share capital money which is lying idle has been deposited in the bank for the purpose of earning interest. The deposit of money in the present case is directly linked with the purchase of plant and machinery. Hence, any income earned on such deposit is incidental to the acquisition of assets for the setting up of the plant and machinery. In this view of the matter the ratio laid down by this court in Tuticorin Alkali Chemicals and Fertilizers Limited v. CIT, will not be attracted. The more appropriate decision in the factual situation in the present case is in CIT v. Bokaro Steel Ltd.. The appeal is dismissed. There will be no order as to costs.' Applying that ratio, the Tribunal deleted the impugned addition and allowed the appeal.