Brief of the case:
ITAT Delhi has held in the case of ITO vs. M/s Factor Power Ltd that Interest Earned on Fund Raised Through Share Capital for installation of thermal power plant , which is been deposited temporarily in bank as fund were lying idle, with a motive to reduce the capital cost of thermal power plant is a Capital Receipt and cannot be taxed as Income From Other Sources.
Facts of the case:
Assessee had into a joint venture with some company for establishing thermal power plant for which it raised capital from public. Assessee had given some advance money and placed the order of the capital goods required for establishment of the plant.Till the time the capital goods reached the plant the funds which asseesee raised from the public was lying idle .So it decided to keep the funds in the bank in the form of FDR so that some cost of project may get reduced. Assessee made the FDR of the Rs 1389 Lakhs and earned interest of Rs 70,75,813/-. Assessee treated the same as a capital receipt and deducted the same from the capital WIP but AO treated the same as a revenue receipt and taxed it under head Income from other sources. Aggrieved from the order of AO ,assessee filed an appeal with CIT(A) which allowed the appeal of assessee .Revenue ,being aggrieved from the decision of CIT(A) it filed an appeal with ITAT who dismissed its appeal.
Contention of the revenue:
Revenue relied on the case law of Tutotorin Akali Chemicals and feritilizers Ltd v/s CIT 227 ITR 172 in which assessee had borrowed funds and made FDR of the borrowed funds. In this case it was held that the earned interest would be treated as income from other sources .
Contention of the assessee:
Assessee was of the view that it had to give some amount of funds as an advance to the contractors because the physical establishment of the same would took time. For that time till the physical establishment took place the funds were lying idle so it decided to deposit the idle funds in the bank for temporary period in the form of FDR so that the cost of project get reduced .Its motive was to reduce to the cost of capital but not to earn the interest. Assessee also argued that in the above case of Tutotorin Akali Chemicals and feritilizers Ltd v/s CIT 227 ITR 172,assessee had borrowed funds from the bank and made the fixed deposit just to earn the interest income but in the case under consideration it had not borrowed the funds but had raised the capital .It had deposited the idle funds in the bank because it would took some time to get the capital goods established in the thermal plant.
Held by the respective court:
ITAT held that in the case of Tutotorin Akali Chemicals and feritilizers Ltd v/s CIT 227 ITR 172 the asseesee had borrowed funds for the business purposes but utilized the same to earn interest ,the interest so generated would be its income from other sources. But in the present case the asseessee had not borrowed funds but had raised the funds through share capital ,Moreover it had raised the capital for establishment of the thermal plant .The funds which the assessee had deposited in the bank were not surplus funds ,that were deposited just for the temporary period till the date physical establishment of the capital goods got placed and payment become due for the same.