By TIOL News Service

NEW DELHI, NOV 09, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether companies engaged in generation of power, are eligible to set off interest earned on borrowed funds kept with the banks as securities, against the expenses incurred during construction of new units for power generation. YES is the answer.

Facts of the case:

The Assessee is a JV company, which supplies whole of the power generated by it from its old plants to SAIL and the newly set up power plant to SAIL and the State Electricity Boards as per agreed ratios at the time of its approval. The tariff to be charged was as per the method approved by CERC, a statutory body. For the AY 2010-11, the assessee filed its return declaring total loss of Rs.6,30,03,76,000/-, paid tax of Rs.21,48,00,023/- u/s 115JB on the declared book profits of Rs. 126,39,01,289/-. During the year under consideration, the assessee commenced power generation from newly set up generation units and raised additional capital as well as borrowed funds for its set up. The assessee capitalized the interest paid on the borrowings for new units till the date of generation of power and made deposits with the banks out of borrowed funds as securities for opening letters of credit etc. or advances of setting up of new units on which the assessee earned interest. Assessee treated this interest as capital receipt and set it off against the interest paid and other expenses during construction which were capitalized. However, during scrutiny, the AO made an addition of Rs. 293 lakhs towards the interest earned during the construction period which according to the assessee has to be set off against the interest that was paid on the borrowed amounts. On appeal, the CIT(A) deleted such addition.

Tribunal held that,

++ it is seen that in assessee’s own case relating to the AY 2007-08, the High Court allowed the set off of interest during the construction period and the said decision is reported in NTPC SAIL Power Co. Pvt. Ltd. vs. CIT - 2012-TIOL-652-HC-DEL-IT. Further following the said decision, a coordinate bench of this Tribunal passed the order in ITA Nos. 1494 & 1495/Del/2013 for A.Ys 2008-09 & 2009-10, wherein the set off was allowed. The Jurisdictional High Court dismissed the appeal preferred by the Department questioning the order passed by this Tribunal in ITA Nos. 1494 & 1495/Del/2013. There is no dispute as to these facts and we have gone through these orders since there is no change in circumstances, and in view of the binding precedent set by the Jurisdictional High Court in assessee’s own case for the AY 2007-08 and followed subsequently, we do not find any illegality or irregularity in the conclusion reached by the CIT(A) that interest during construction has to be allowed as set off and uphold the same.

(See 2017-TIOL-1553-ITAT-DEL)