By TIOL News Service

NEW DELHI, JAN 14, 2016: THE issue is whether interest accrued on FDRs can be taxed as 'income from other sources', when the assessee has clearly shown that FDRs on which such interest were placed with the bank as margin money for procurement of various capital goods for setting up of power project. NO is the answer.

Facts of the case:

The assessee is engaged in the business of generation, improvisation and sale of electric power by establishing thermal power plants, atomic power plants etc. In the year under consideration, no business activity was carried out by the assessee as the project was under implementation. On scrutiny, the assessment u/s 143(3) were initiated, wherein, the AO noted that the assessee had received an amount of Rs. 70,75,843/- from State Bank of Mysore as interest on fixed deposits but that the said amount was not declared in the return as 'income from other sources'. It was also noted by the AO that the assessee had reduced the said interest amount from the capital work in progress and, therefore, the assessee was required to provide an explanation as to why the said interest income should not be treated as 'income from other sources'. The assessee submitted that it had earned interest on FDRs which were placed with the bank as margin money for procurement of various capital goods for setting up of the power project. The AO did not accept the explanation offered by the assessee and made an addition of Rs. 70,75,843/-. On appeal, the CIT(A) deleted the said addition.

After hearing the parties, the High Court held:

++ this court is of the view that no substantial question of law arises for our consideration. This is so because, in our view, the Tribunal has correctly placed reliance on the decision of this Court in Indian Oil Panipat Power Consortium Limited. The facts in that case were quite similar. In that case also monies had been received as share capital by the assessee which were temporarily put in fixed deposits awaiting acquisition of land which had run into legal entanglements on account of title. The question of law which was raised before the Division Bench was whether the Tribunal misdirected itself in law in holding that interest which accrued on funds deployed with the bank could be taxed as income from other sources and not as capital receipt liable to be set of against pre-operative expenses. The Division Bench considered the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd and held that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. It is evident that the test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the same. In the present case, findings of fact have been returned by the CIT(A) and have been confirmed by the ITAT to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The counsel for the revenue has also not been able to point out any perversity in such finding and, therefore, the factual findings have to be taken as those accepted by the ITAT which is the final fact finding authority in the income tax regime. That being the case, the decision of the Division Bench in Indian Oil Panipat Power Consortium Limited would squarely apply to the facts of the present case and the Tribunal was right in applying the same.

(See 2016-TIOL-82-HC-DEL-IT)