TaxTMI 
TaxTMI 
2026 (4) TMI 1115
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....as completed under section 143(3) of the Act on 17.12.2019 determining total income at Rs. 35,49,250/-. 3. During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned interest income of Rs. 37,58,095/- on fixed deposits maintained with Union Bank of India. The assessee had not offered the said income to tax but had capitalised the same to work-in-progress of its real estate project. On examination of the records, the Assessing Officer observed that the assessee had been allotted a Slum Rehabilitation Project at Nirmal Nagar by the Slum Rehabilitation Authority (SRA) and had furnished a bank guarantee backed by fixed deposits. However, the Letter of Intent issued by SRA was subsequently cancelled and the appointment of the assessee as developer stood terminated. The Assessing Officer further noted that SRA had communicated to the bank for release of the bank guarantee and, therefore, according to him, the project had effectively ceased. 4. In view of the above, the Assessing Officer held that there was no ongoing business activity during the year and the fixed deposits had no direct nexus with any active project. Accordingly, the inter....
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....e of bank guarantee. It was observed that the interest income was earned on idle funds and did not have any direct nexus with active business operations during the year. Relying upon the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (227 ITR 172), the learned CIT(A) held that interest earned on surplus funds in the absence of business activity is taxable under the head "Income from Other Sources". The judicial precedents relied upon by the assessee were distinguished on facts. The learned CIT(A) also rejected the contention of the assessee based on the principle of consistency, observing that the facts in the year under consideration were materially different from earlier years. The reliance on Accounting Standard AS-16 was also not accepted, holding that accounting treatment is not determinative of taxability under the Act. Accordingly, the addition of Rs. 37,58,095/- made by the Assessing Officer was confirmed and the appeal of the assessee was dismissed. 7. Being aggrieved, the assessee is in appeal before us and has raised the following grounds: 1. The Learned CIT(A) erred in confirming the action of the Assessing Off....
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....or before the final hearing. 8. The learned Authorised Representative (AR) reiterated the submissions made before the lower authorities. It was submitted that the assessee is engaged in the business of development of real estate projects and had been allotted a Slum Rehabilitation (SRA) project at Nirmal Nagar, Sion-Koliwada, Mumbai, vide Letter of Intent dated 15.09.2009. The said project, however, got delayed due to technical reasons and the SRA authorities directed cancellation of the project vide communication dated 01.12.2015. The assessee, being aggrieved, challenged the cancellation by filing a writ petition before the Hon'ble Bombay High Court. It was further submitted that the Hon'ble High Court had granted interim relief by way of maintaining status quo, and therefore, the cancellation of the project had not attained finality. In view of the pendency of the writ proceedings, the project continued to subsist in the eyes of law during the year under consideration and was required to be treated as an ongoing project for accounting and tax purposes. The learned Authorised Representative submitted that one of the pre-conditions imposed by the SRA authorities was furnishing ....
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....y High Court in CIT vs. Paramount Premises Pvt. Ltd. (190 ITR 259) is also misplaced. 10. The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned CIT(A) and inviting our attention to para 6.6 and 6.7 of the impugned order, submitted that the learned CIT(A) has rightly applied the ratio laid down by the Hon'ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (227 ITR 172). 11. We have carefully considered the rival submissions, perused the orders of the lower authorities and examined the judicial precedents relied upon by both the parties. At the outset, it is an undisputed factual position that the fixed deposits were not made as an independent investment of surplus funds but were created as a pre-condition for furnishing bank guarantee in connection with the SRA project. It is further evident that the cancellation of the project was under challenge before the Hon'ble Bombay High Court and had not attained finality during the year under consideration. 12. At this juncture, it is also pertinent to note that the bank guarantee furnished by the assessee had not been cancelled during the year under cons....
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....st is taxable... On the other hand, if income is earned on funds which are "inextricably linked" to the setting up of the plant, such income is required to be capitalized." 18. Further, it was observed: "Since the funds... were primarily infused for a specific purpose... the interest earned... could not have been classified as "income from other sources"." (para 5.2) 19. In the context of bank guarantees, the Hon'ble Karnataka High Court in CIT vs. Chinna Nachimuthu Constructions (297 ITR 70) has held: "The investment... in fixed deposits... was only to secure a bank guarantee... therefore, it cannot be treated as income from other sources and interest... has to be treated as business income." (para 4) 20. Further, the Hon'ble Bombay High Court in CIT vs. Paramount Premises Pvt. Ltd. (190 ITR 259) has recorded a finding of fact as under: "The Tribunal has given a finding... that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity." (para 2) 21. The above binding precedents clearly lay down that the determinative test is the existence of an inextricable nexus between the income....