AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2019 (6) TMI 1411
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..... concerning AY 2013-14 for the purposes of adjudication. 3. The substantive grounds of appeal raised by Revenue read as under: "1) "On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in giving finding that interest of Rs. 1,05,14,115/- on margin money kept for obtaining bank guarantee/letters for credit for 'power' business is to be assessed under the head 'Business Income' and upholding the action of the assessee in reducing the above amount from the work in progress (WIP) account, ignoring the detailed reasoning given by the assessing officer in para 6 of the assessment order that it is taxable under the head 'Income from Other Source'." 2. "On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in allowing the corresponding interest expenditure against the interest receipts as 'Income from Other Sources'." 4. As per Ground No.1 of the Revenue's appeal, the AO has impugned the action of the CIT(A) in treating interest income on margin money deposits of Rs. 1,05,14,115/- to be of capital nature linked with the process of setting up its power project and consequently, such receipt would go to reduce the cost of the proj....
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....e expenses, the interest received on fixed deposits have been rightly reduced from the cost of the project in progress. The AO however found the action of the assessee for reducing the interest income from cost of the project instead of offering the same as taxable income to be untenable. The AO relied upon the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [19971 227 ITR 172 (SC) and some other decisions to hold that interest income is assessable as 'income from other sources'. 6. Aggrieved, the assessee preferred appeal before the CIT(A). The CIT(A) relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Bokaro Steel Ltd. [1999] 236 ITR. 315 (SC) which was again followed by Hon'ble Supreme Court in CIT vs. Karnal Cooperative Sugar Mills Ltd. (2000) 243 ITR 7 and adjudicated the issue in favour of the assessee. The relevant operative para of the order of the CIT(A) is reproduced hereunder: "13. I have carefully considered the facts of the case, the assessment order and the written submissions of the appellant. I have also perused the judicial decisions relied on by the AO and the appellant. It is ....
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....gible to tax. However, the claim of the assessee in the revised return was not accepted by the AO and the interest income was charged to tax as Income from Other Sources. While deciding this issue, the Hon'ble Supreme Court held as under: "The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. 'Profits and gains of business or profession' is only one of the heads under which the company's income is liable to be assessed to tax. If a company has not commenced business, there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business, its income from any other source will not be taxed If the company, even before it commences business, invests the surplus fund in its hand for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases a rented house and gets rent, such rent will be assessable to tax under section 2....
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....terest on the loan taken will not make the interest income as a capital receipt The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under section 56 of the Act. This Court also emphasised the fact that the company was not bound to utilise the interest so earned to adjust it against the interest paid on borrowed capital. The company was free to use this income in any manner it liked. However, while interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or busine....
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....omes earned from utilisation of various assets for the purpose of the activity of setting up the plant were held to be capital receipts which go to reduce the cost of construction, as they are inextricably linked with the setting up of the capital structure of the assessee. 19. Similar principle was followed by the Hon'ble Supreme Court subsequently in the case of Karnal Co-operative Sugar Mills Ltd., wherein the Hon'ble Court specifically dealt with interest receipts arising from deposits made with a bank for opening a LC for the purchase of machinery required for setting up the plant. The Hon'ble Supreme Court held as under: 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....
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....ipment/ machinery and other materials for setting up of the units of the power plants in Phase-I and Phase-II. Hence, such interest receipts partake the character of capital receipts which go to reduce the capital cost as per the ratio laid down by the Hon'ble Supreme Court in the cases of Bokaro Steel Ltd. and Karnal Co-operative Sugar Mills Ltd. 23. Hence, by relying on the said binding decisions of the Hon'ble Supreme Court which are squarely applicable to facts of the present case, it is held that the decision of the AO to treat the said interest receipts from margin money deposits as income chargeable under the head Income from Other Sources is not in accordance with the law. The AO is therefore directed to delete the addition of Rs. 1,05,14,115/- made in this regard. These grounds of appeal are therefore allowed." The CIT(A) eventually held that interest received from margin money deposits inextricably linked with the installation of project cannot be seen as independent source of income but would form part of the cost of the project under progress. The CIT(A) accordingly reversed the action of the AO and deleted the addition of Rs. 1,05,14,115/- made in th....
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....he banks (while the power project construction is under progress and in the process of being set up and has not commenced generating electricity) can be set off against the ongoing power project costs incurred of capital nature and consequently, whether such interest income would go to reduce project costs prior to its commencement or not. It is the case of the assessee that the AO clearly mis-appreciated the facts and wrongly characterized interest income derived from fixed deposits utilized towards margin money for obtaining bank guarantee in relation to capital project in process and wrongly held such income to be liable to tax as 'income from other sources' under s.56 of the Act. It is further case of the assessee that the CIT(A) has correctly appreciated the facts and applied the law in perspective while holding such interest income to be capital in nature and would consequently go to reduce the power project costs being set up. It is primarily the case of the assessee that the interest income derived from margin money deposits is inextricably linked to the project being set up. Hence, the interest income is required to be regarded as income of capital nature for the purposes ....