Interest on FD made out of Share Capital under constraint is Capital Receipt

Elgen (India) Pvt. Ltd. Vs. ITO (ITAT Hyderabad)

In case the share capital is brought for specific purpose for the implementation of the particular project, and interest is earned by temporarily depositing in the bank, such income can be treated as capital receipt. In the given case, assessee has brought the share capital only for the implementation/ commencement of the power project. Since, it could not proceed with the implementation, under constraint, it kept the unutilized funds in the bank; in that process it has earned interest; By following the ratios of Hon’ble Supreme Court, the funds kept in bank under constraint and the funds are inextricably linked to the project, such income can be treated as capital receipt. At the same time, the findings of Delhi High court in the similar circumstances as in the case under consideration are fully applicable to the case in hand. Therefore, in our considered view, the assessee is eligible to treat the interest as capital receipt. Whether the assessee can utilize this receipt to set off the other pre- implementation expenses, in our view, we have already treated the interest receipts as capital in nature and the pre- commencement expenses are also capital expenditure, the assessee can set off such expenses.

Full Text of the ITAT Order is as follows:-

Both these appeals filed by the assessee are directed against a common order of the learned Commissioner of Income-tax(A)- 5, Hyderabad, dated 29-07-2016 for AYs 2012-13 & 2013-14. As the issue is identical in both the appeals, the same were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.

2. Briefly the facts of the case, as taken from AY 2012-13, are that the assessee, is a company, yet to start commercial operations, filed its return of income for the AY 2012-13 on 28/09/2012 admitting therein loss of Rs. 3,71,359/-. The said return was selected for scrutiny under ‘CASS’ category, therefore, a notice u/s 143(2) was issued on 07/08/2013. In response to the said notice, the AR of the assessee appeared and furnished the information called for. After considering the information furnished, the AO determined the income of the assessee as under:

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