2004 (8) TMI 331 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest income during the implementation of the project and prior to the commencement of business.
2. Taxability of bidding fees.
3. Applicability of Supreme Court judgments in similar cases.

Detailed Analysis:

1. Treatment of Interest Income:

The primary issue revolves around whether the interest income earned by the assessee during the implementation of the project and prior to the commencement of business should be treated as a capital receipt or as income from other sources. The assessee earned interest on deposits made with the bank out of borrowed funds for opening Letters of Credit (LC) and also from surplus funds available from equity and loan funds.

- Assessee's Argument: The interest income should be treated as a capital receipt and set off against the capital cost of the project. The deposits were made out of business compulsion to comply with the loan conditions from the Government of Orissa, which required the amount to be deposited in banks and pledged to cover LC liability for importing plant and machinery.

- Revenue's Argument: The interest income is of revenue nature and should be taxed as income from other sources. The interest earned on surplus funds deposited in banks is not directly linked to the acquisition of fixed assets and should be taxed accordingly.

- CIT(A)'s Findings: The CIT(A) directed the AO to determine whether the deposits were directly linked to the purchase of plant and machinery and if the income earned on these deposits was incidental to the acquisition of assets. The CIT(A) concluded that:
- Interest earned from deposits made with SBI Caps during the period they were pledged as collateral for LCs should not be taxable and can be capitalized to reduce the project cost.
- Interest earned from deposits unrelated to LCs and deposits with other banks should be taxable as income from other sources.
- Bidding fees should not be taxable and should be capitalized.

- Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision with some modifications:
- Interest earned on deposits made as a business compulsion and directly linked to the acquisition of plant and machinery is a capital receipt and not taxable.
- Interest earned on other deposits not directly linked to the acquisition of fixed assets is taxable as income from other sources.
- Interest received from the IT Department under Section 244 is taxable as income from other sources.

2. Taxability of Bidding Fees:

- CIT(A)'s Findings: The CIT(A) concluded that bidding fees received by the assessee from contractors should be capitalized and not treated as income from other sources.

- Tribunal's Decision: The Tribunal agreed with the CIT(A) that the bidding fees are similar to the nature discussed in the case of Bokaro Steels Ltd. and should be set off against the capital cost of the project.

3. Applicability of Supreme Court Judgments:

- Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. CIT: The Supreme Court held that interest income earned from surplus funds invested in short-term deposits is taxable as income from other sources.

- CIT vs. Karnal Co-operative Sugar Mills Ltd.: The Supreme Court held that interest earned on deposits made to open LC for purchasing machinery required for setting up a plant is a capital receipt and should reduce the cost of the assets.

- CIT vs. Bokaro Steel Ltd.: The Supreme Court held that income earned during the implementation of a project, which is intrinsically connected with the construction activities, is a capital receipt and should be set off against the capital cost.

- Tribunal's Decision: The Tribunal applied these judgments to the facts of the case and concluded that:
- Interest earned on deposits made as a business compulsion for opening LCs is a capital receipt.
- Interest earned on other deposits not directly linked to the acquisition of fixed assets is taxable as income from other sources.
- Bidding fees should be capitalized.

Conclusion:

The Tribunal's decision provides a detailed analysis of the treatment of interest income during the project implementation phase, distinguishing between capital receipts and income from other sources based on the direct and proximate connection with the acquisition of fixed assets. The decision also aligns with the principles laid down by the Supreme Court in similar cases, ensuring that the interest income earned out of business compulsion for acquiring assets is treated as a capital receipt, while other interest income is taxable as income from other sources. The bidding fees received by the assessee are to be capitalized and not treated as taxable income.