ACIT Vs Chenani Nashri Tunnelway Ltd (ITAT Mumbai)
Interest on FDs to Reduce Project Cost – No Tax on Interest During Construction – ITAT Upholds Capitalization Against CWIP
ITAT Mumbai dismissed Revenue’s appeal & upheld CIT(A)’s order allowing capitalization of interest earned on short-term fixed deposits out of borrowed funds. Tribunal held that such interest income was inextricably linked with the highway project under construction & therefore required to be reduced from capital work-in-progress (CWIP) instead of being taxed under “income from other sources.”
Assessee, a special purpose vehicle, had entered into a concession agreement with NHAI in June 2010 for rehabilitation, strengthening & four-laning of Chenani to Nashri section of NH-1A on BOT basis in Jammu & Kashmir. During AY 2012-13, while the project was still under construction, Assessee earned interest of Rs.3.44 crore on fixed deposits created from borrowed funds. Assessee reduced this interest from CWIP treating it as capital in nature. AO, however, held that interest on unutilized borrowed funds was taxable under “income from other sources” relying on Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT [227 ITR 172 (SC)], & made addition of Rs.3.44 crore.
On appeal, CIT(A) allowed relief following earlier ITAT decisions in Hazaribagh Expressway Ltd. & Infrastructure Development Company of Rajasthan Ltd., holding that interest on funds temporarily parked but earmarked for project construction must reduce project cost.
