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2018 (6) TMI 1672 - ITAT MUMBAIInterest on margin money kept for obtaining bank guarantee for credit for power business as business income - Characterization of income - HELD THAT:- We find that the assessee was setting up a thermal power plant that during the year under appeal the project of construction of the power plant was under progress and no commercial activities whatsoever had begun that all the major expenses incurred in relation to the project were capitalised under 'capital work in progress that during the year under appeal the assessee had earned interest income out of the funds augmented for issuing bank guarantee to various parties in connection with the construction of the power projects as well as for meeting the various expenses for purchase of various assets required in the construction of the power plant, that the same was treated as capital asset by the assessee that it was accordingly reduced from the capital work in progress and was claimed as business income. In our opinion in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant the interest incurred before the commencement of production on such borrowed money has to be capitalised and has to be added to the cost of the fixed assets created as a result of such expenditure. Similarly if the assessee receives any amount which is inextricably linked with the process of setting up its plant and machinery such receipts will go to reduce the cost of its assets. We also hold that treatment of the receipts depends on the purpose for which the funds are utilised. The use of funds decides the characterisation of the amount. In the case under consideration that the interest receipt was directly linked to setting up of business apparatus of the assessee. It was not idle money that was invested or parked for earning interest. We have perused the clause 2.4 of Significant Accounting Policies as appearing in Schedule XI and are of the opinion that the interest income earned by the assessee had direct and intimate connection with its business. Setting of power plants takes time and the assessee has to make investment with banks for availing various facilities. FAA had rightly held that in the case of interest receipts on margin deposits kept with the banks for the purpose of getting the Credit Facilities which were required for the construction of the plant it was to be allowed to be reduced from the cost of the plant and was to be held as not taxable. So confirming her order we hold that her order does not suffer from any factual or legal infirmity. Effective ground of appeal is decided against the AO.
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