2024 (10) TMI 1566

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....referred to as "AO"], dated 20.12.2018, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as "the Act"] for Assessment Year (AY) 2016-17. Facts of the case: 2. The assessee is a Special Purpose Vehicle (SPV) incorporated for undertaking infrastructure development projects under the Build-Operate- Transfer (BOT) model. For AY 2016-17, the assessee filed a return of income claiming a deduction of Rs. 20,93,513/- under Section 80-IA(4) of the Act. The assessee-company declared profits derived from its eligible infrastructure project and claimed a 100% deduction under Section 80-IA(4) of the Act. The AO, during scrutiny proceedings, noted that the assessee earned interest income of Rs. 27,83,063/- from FDRs ....

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....pment. The CIT(A) placed reliance on the same judicial precedent, Tuticorin Alkali Chemicals, to confirm that interest on FDRs, being passive income, did not have the necessary nexus with the infrastructure business. The CIT(A) noted that the interest earned on FDRs was not incidental to the infrastructure project but was generated by investing funds in deposits, thus distinguishing it from the operational profits eligible for deduction under Section 80-IA(4) of the Act. 4. Aggrieved by the order of the CIT(A), the assessee is in appeal before us with following grounds of appeal: "The Learned C.I.T.(Appeals) has erred in law and on facts of the case, in upholding the disallowance u/s. 801A of Rs. 20,93,513/-. The appell....

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....BOT arrangement. Since the company's entire business activity revolved around this infrastructure project, the FDRs maintained with the bank were exclusively for the purpose of securing the loan for the project. Therefore, the interest income derived from these FDRs should be treated as part of the core business profits, qualifying for the deduction under Section 80-IA(4) of the Act. 6. The Departmental Representative (DR) contended that the purpose of the loan taken by the assessee was not restricted to financing the infrastructure project. It included repayment of unsecured loans, and it was not clear if the entire loan amount was exclusively used for the infrastructure project. Therefore, the interest income earned on the FDRs should ....

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....ively formed to develop, operate, and maintain an infrastructure project under the Build-Operate-Transfer (BOT) model. As an SPV, the assessee does not engage in any other business or project apart from this infrastructure development activity. The Fixed Deposits (FDRs) were not created out of surplus or idle funds, but were a business necessity, specifically mandated by Punjab National Bank (PNB) as part of the loan agreement for financing the infrastructure project. The loan sanction letter clearly required the maintenance of a Debt Service Reserve Account (DSRA) through FDRs to ensure timely repayment of the loan. The FDRs were therefore a vital part of the project's financial structure, and their creation was integral to the successful ....

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....n condition imposed by PNB, which was essential for financing the infrastructure project. The FDRs were not independent investments but were integral to the business's financing structure. The interest income arising from these FDRs was incidental to the core business activity of infrastructure development and thus should be considered as "profits derived from" the business for the purposes of Section 80-IA(4) of the Act. 7.4. The Hon'ble Gujarat High Court, in CIT v. Shah Alloys Ltd. [2017] 396 ITR 711 (Guj), held that interest income earned on FDRs maintained as margin money for securing business loans qualifies as business income when the FDRs are closely linked to the business's financial structure. This principle is squarely applica....