Project-linked interest income may be netted off against project cost where deposits directly fund asset acquisition.

Interest earned on bank deposits directly linked to the acquisition and setting up of plant and machinery for a solar power project may be treated as incidental to the project cost, not as separate income. Where the deposit has a direct nexus with project implementation, such receipts can be capitalised or netted off against project expenditure rather than assessed independently. Applying that principle, the interest addition was deleted and the assessee's treatment was accepted.

---

---

Issues: Whether interest income earned on bank deposits connected with the setting up of a solar power plant was liable to be capitalised and netted off against interest expenditure, instead of being assessed separately as income.

Analysis: The deposit was found to be directly linked with the acquisition and setting up of plant and machinery for the project. The interest earned on such deposit was treated as incidental to the project cost and not as independent income from idle funds. On that basis, the earlier view sustaining the addition was held to be inconsistent with the governing principle that project-linked receipts having direct nexus with acquisition of assets may be adjusted against the project expenditure.

Conclusion: The issue was answered in favour of the assessee, and the addition on account of interest income was deleted.

Ratio Decidendi: Interest earned on deposits that are directly linked to the acquisition or setting up of a project is incidental to the project and may be capitalised or netted off against project expenditure rather than assessed as separate income.

---