Interest on FDR can not be capitalised if capital asset is not setup : Bombay HC

By | August 18, 2018
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(Last Updated On: August 18, 2018)


Shree Maheshwar Hydel Power Corporation Ltd.


Commissioner of Income-tax


IT APPEAL NO. 67 OF 2016

JULY  17, 2018

Manish Kanth and Atul Jasani for the Appellant.


1. This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act), challenges the order dated 18.3.2015 passed by the Income Tax Appellate Tribunal (the Tribunal). The impugned order dated 18.3.2015 is in respect of Assessment Year 2010-11.

2. Appellant-Assessee urges the following two questions of law, for our consideration:

“(a)Whether on the facts and in the circumstance of the case and in law, the Tribunal was right in confirming the order of CIT(A) holding that the bare fact that the assessee deposited money in the bank itself is not sufficient to show that the deposit was made with a view to carrying out the business in the sense of earning profit by investment, ignoring that appellant had never claimed before any authority that the interest so earned is income from business and that the appellant, relying on the decision of Supreme Court in CIT v. Bokaro Steels Ltd. has been contending that interest so earned is capital receipt as is inextricably linked to the project ?
(b)Whether on facts and in circumstances of the case and in law, the Hon’ble Tribunal is right in not adjudicating the alternate argument taken before it that the interest on Fixed Deposit kept in lien favoring trustees of debenture holders is not the income of the assessee but that of the beneficiary debenture holders, relying on the decision of Jurisdictional Bombay High Court ?”

3. Re. Question (a):—

(i)The Appellant-Assessee is engaged in generation/manufacture of power and energy by setting up hydro power project. The Appellant had issued Optional Fully Convertible Debentures (OFCD). The amounts were deposited in Bank and earned interest thereon. The Appellant sought to capitalise the same on the ground that the same was for purposes of setting up of hydro electric power projects. The Assessing Officer did not deal with this claim as it was not made before him in the return of income.
(ii)In appeal, the Commissioner of Income Tax (Appeals) [CIT (A)] did examine the claim and came to conclusion that the same could not be capitalised. This inter-alia on the ground that it was not raised for construction of project and/or purchase of plant and machinery or obtaining any letter of credit, etc. in relation to any capital expenditure. It was revised only with a view to reduce the tariff of the project, which was on the verge of being abandoned.
(iii)Being aggrieved with order of CIT (A), the Assessee preferred an further appeal to the Tribunal. By the impugned order, the Tribunal dismissed the Appellant’s appeal by inter-alia holding as under:
“Considering the facts of the present case that there was neither setting up nor commencement of business during the year under consideration, that non commencement of the project is continuing since 1993, that the money raised in form of OFCE was not raised for any construction of project or purchase of plant and machinery or for obtaining any license for letter of credit etc. but was only done with a specific and limited purpose to reduce resultant tariff of the project, that interest earned by the assessee from the nationalised banks had nothing to do with the setting up or commencing of the business, that it was a pure and simple case of accruing interest income from deposit-we are of the opinion that the assessee earned the interest from the bank deposits and earning of interest was plainly not in the ordinary course of its business and that the interest earned by the assessee was rightly assessed under the head income from other sources.”
(emphasis supplied)
(iii)Thus, we note that earning of interest was not inextricably linked with setting up of plant or any other capital expenditure was a finding of fact rendered by the Authorities under the Act. Further it was a pure case of interest on deposit in bank. Further the authorities also find as a fact that the amounts received in the form of OFCD was not received for purchase of plant and machinery but to reduce the tariff of the project.
(iv)Mr. Kanth the learned counsel appearing in support of the Appeal submits that the impugned order of the Tribunal is not correct in law. It is submitted that it is contrary to the Apex Court decisions in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 and CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2. Further, the decisions of the Delhi High Court in CIT v. Sasan Power Ltd. [2012] 205 Taxman 56 (Mag.), Pr. CIT v. Facor Power Ltd. [2016] 380 ITR 474 and Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 315 ITR 255 (Delhi) it is submitted also supports its stand.
(v)We find that both the CIT (A) as well as the Tribunal had found on facts that the amounts raised by OFCD and also the interest earned by the Appellant-Assessee from a the amounts deposited with nationalised bank has nothing to do with the setting up of capital assets. Therefore, in these circumstances, interest earned could not be capitalised. We find that the decision of the Tribunal is in accord with the decision of the Apex Court in Bokaro Steels (P.) Ltd. (Supra) and Karnal Co-operative Sugar Mills Ltd. (Supra) wherein it has been held that income earned in connection with those activities which are directly connected with the setting up of plant and machinery could alone be capitalised. So far as the decisions of the Delhi High Court are concerned, all of them proceeded on its own facts. In Sasan Power Ltd. (Supra), it was found that interest received on unutilised commitment advances as well as interest paid on commitment advance was treated as capital expense as it was inextricably linked to the purchases/construction of power plant. So also in the case of Facor Power Ltd. (Supra) of Delhi High Court held that money to be used in purchases of plant and machinery which was temporarily placed in fixed deposit was linked to setting up of plant and thus, allowed to be capitalised. In Indian Oil Panipat Power Consortium Ltd. (Supra), Court held that the interest earned prior to the commencement of business on funds brought in by way of share capital for specific purposes of acquiring land was capital receipt. This was required to be set off against pre-operating expenses.
(v)In the decisions of the Delhi High Court in Sasan Power Ltd. (Supra) and Facor Power Ltd. (Supra) the Tribunal had come to finding of fact that interest which has been earned is in respect of deposits made in the course of/for setting up of plant. Thus, the interest was capitalised. So far as Indian Oil Panipat Power Consortium Ltd. (Supra) is concerned, it was earned prior to commencement of business and could be set off against pre-operative expenses. The fact situation in this case is completely different. In the present facts, both the CIT (A) and the Tribunal have rendered a finding of fact that the interest earned is not inextricably linked to setting up of plant and machinery on the part of the Appellant-Assessee. It also records a finding that money by OFCD was not received for setting up of plant. Therefore, cannot be capitalised. We find that on the facts as found by the Authorities, the decision of the Apex Court in Bokaro Steels Ltd. (Supra) and Karnal Co-operative Sugar Mills Ltd. (Supra) has been correctly applied.
(vi)In the aforesaid circumstances, question as framed at Sr. No.(a) does not give rise to substantial question of law as it is eventually a finding of fact, which is not shown to be perverse in any manner. Thus, not entertained.

4. Re. Question (b):—

(i)Mr. Kanth the learned counsel for the Appellant very fairly states that the impugned order of the Tribunal does not make reference to the issue raised in this question. The Appellant had also filed Rectification Application seeking to bring its alternate submissions on record as having been urged at the hearing of the appeal before the Tribunal. However, the Rectification application stood dismissed by the Tribunal in the year 2016. The Appellant has not challenged the same.
(ii)In the above view, as this question was not urged before the Tribunal, no occasion to entertain the same arises in view of the decision of this Court in CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395.
(iii)Thus, this question also does not give rise to substantial question of law. Thus, not entertained.

5. Accordingly, appeal dismissed.

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