Case Law Details
Brief of the case:
AO made addition on account of interest earned on FDRs put in bank for procurement of capital asset by holding that no such capital assets is acquired by assessee during the year under consideration. CIT (A) granted relief to the assessee. On further appeal to ITAT by revenue appeal was dismissed and it was held that amount was invested by joint venture partner by raising share capital and funds were directly linked with setting up of project.
Facts of the case:
- The assessee company was incorporated on 24.08.2005 to carry on in India or elsewhere the business to generate, receive, produce, improve, buy, sell, etc. in electric power by establishing thermal power plant, active power plants etc.
- During the year under consideration, no business activities were carried out by the assessee as the project was under implementation. The case of the assessee was selected for scrutiny.
- During assessment proceedings, the AO observed that assessee had received an amount of Rs.70,75,843/- from State Bank of Mysore as interest on fixed deposits but the same was not declared in the return of income as income from other sources.
- On further perusal of details, the AO observed that the assessee had reduced such interest from capital w.i.p. (capital work in progress), therefore, the assessee was asked to provide an explanation as to why interest income of Rs.70,75,813/- be not treated as income from other sources.
- The AO after relying upon the case law of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs CIT 227 ITR 172, made the addition of R.70,75,843/- as income from other sources.
Contention of the revenue:
- The company had earned interest income on completion of project on time.
- The case law of Tuticorin (supra) as relied upon by AO was applicable to the facts of the case of the assessee.
- The assessee had no compulsion for making fixed deposits with the bank as these were not made as margin money or against letter of credit.
- There was no compulsion to the assessee to place funds in the form of bank deposits.
Contention of the assessee:
- Assessee had earned interest income from FDRs which were placed with bank as margin money for procurement of various capital goods required for setting up of the project.
- The expenditure including capital advances were used from share application money which were temporarily put in Fixed Deposits awaiting for the payments to be made for awarding new contracts and for further payments of existing contract.
- Funds placed in FD were inextricably linked with the project and in this respect, case law decided by Hon’ble Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd. Vs ITO 315 ITR 255 was also relied upon.
Held by CIT (A):
- CIT(A) after going through the copy of contract filed by assessee awarded during July 2008 to June 2009 observed that funds which were kept temporarily in the form of fixed deposits were linked with the setting up of project and cannot be categorized as surplus funds.
Held by ITAT:
- In the case of Tuticorin Alkali Chemicals (supra) the funds which were placed in the form of FD were raised by way of loan whereas in the present case, the assessee had raised funds through share capital.
- In the present case, the funds placed in bank deposits were not raised by borrowing funds and rather they were raised through share capital as noted by CIT(A) at page 8 of his order.
- In the case of M/s. Indian Oil Panipat Power Consortium Ltd., Hon’ble Delhi High Court after considering Hon’ble Supreme Court decision in the case of Tuticorin has held as under:
“In our opinion, the Tribunal misdirected itself in applying the decision of the Supreme Court in Tuticorin Alkali Chemicals (supra) in the facts of the present case. In our opinion on account of the finding of fact returned by the CIT(A) that the funds infused in the assessee by the joint venture partner were inextricably linked with the setting up of the plant, the interest earned by the assessee could not be treated as income from other sources.”
