Facts of the Case

The assessee, a company engaged in setting up a thermal power project, had not commenced commercial production during the relevant assessment years (AY 2013-14 and AY 2014-15). During the construction period, it received:

  • Interest income from bank deposits made out of funds infused for project implementation
  • Amounts arising from forfeiture of earnest money deposits (EMD) and other recoveries from contractors

The assessee treated these receipts as capital in nature, adjusting them against pre-operative expenses to reduce the project cost. The Assessing Officer, however, treated such amounts as taxable income, particularly under the head “Income from Other Sources.”

Issues Involved

  1. Whether interest earned on bank deposits during the pre-commencement phase of a project constitutes taxable income under Section 56 or a capital receipt linked to project construction.
  2. Whether forfeiture of contractor earnest money deposits and related recoveries is taxable income or capital receipt to be adjusted against project cost.

Petitioner’s (Assessee’s) Arguments

  • The business had not commenced; all activities were related to setting up the project.
  • Funds deposited in banks were temporarily parked pending utilization for construction; earning interest was incidental.
  • The receipts were inextricably linked to project implementation and therefore capital in nature.
  • Forfeited EMD and recoveries from contractors arose directly from construction activities and should reduce project cost.
  • Judicial precedents supported capitalization of such receipts during the pre-operative period.

Respondent’s (Revenue’s) Arguments

  • Interest earned from bank deposits constituted income irrespective of business commencement.
  • The Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. mandates taxation of such interest as “Income from Other Sources.”
  • The CIT(A) erred in granting relief by relying on prior decisions without considering binding High Court precedents.

Court Order / Findings (ITAT)

  • The Tribunal examined whether the receipts were intrinsically connected with project construction or arose from independent sources.
  • It observed that receipts closely linked to the process of setting up the plant may qualify as capital receipts reducing project cost.
  • Reliance was placed on principles laid down in Bokaro Steel Ltd., where receipts integrally connected with project implementation were held capital in nature.
  • Given the factual aspects requiring deeper verification, the matter relating to interest income was restored to the CIT(A) for fresh adjudication in accordance with law after considering relevant precedents and facts.
  • The assessee’s appeal regarding forfeiture of earnest money was allowed, recognizing its connection with construction activities.

Important Clarification

  • Independent income-generating activities → taxable revenue receipts
  • Inextricably linked to project construction → capital receipts reducing project cost

Link to download the order - https://itat.gov.in/public/files/upload/1611910705-ITA%2080%20175%20177%20Meja%20Urja%20Nigam%20Pvt.%20Ltd..pdf

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