Facts of the Case

  • The assessee earned interest on FDRs during the construction phase of its project.
  • The ITAT allowed capitalization of such interest, holding it to be intrinsically linked to project development.
  • The Revenue challenged this finding before the Delhi High Court.

 Issues Involved

  1. Whether interest earned on FDRs during the construction period should be treated as income from other sources or as a capital receipt.
  2. Whether such interest can be capitalized and reduced from project cost.
  3. Whether non-compliance with RBI guidelines in utilization of ECB funds affects tax treatment of such interest.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in allowing capitalization of interest on FDRs.
  • The assessee failed to comply with RBI guidelines while utilizing ECB funds.
  • Reliance was placed on Tuticorin Alkali Chemicals & Fertilizers Ltd. vs CIT (1997), where interest income was held taxable as income from other sources.

Respondent’s Arguments (Assessee)

  • The interest earned was inextricably linked with the setting up of the project.
  • Such receipts should be treated as capital in nature and adjusted against project cost.
  • Reliance was placed on judicial precedents distinguishing Tuticorin Alkali and supporting capitalization.

Court Findings / Judgment

  • The Court relied on earlier decisions including:
    • CIT vs Bokaro Steel Ltd. (1999)
    • Indian Oil Panipat Power Consortium Ltd. vs ITO (2009)
    • PCIT vs Facor Power Ltd. (2016)
  • It was held that:
    • If receipts are inextricably linked with setting up of plant/project, they are capital in nature.
    • Such receipts cannot be taxed as income from other sources.
  • The Court noted that the issue was already covered in assessee’s own case for earlier AY 2012–13.
  • No substantial question of law arose, and the appeal was dismissed.

Court Order

  • Appeal filed by the Revenue was dismissed.
  • ITAT order allowing capitalization of interest was upheld.

Important Clarification

  • The judgment reaffirms that:
    • Test of “inextricable link” is decisive in determining taxability of pre-operative income.
    • Mere earning of interest does not automatically make it taxable under “Income from Other Sources”.
    • Distinction between Tuticorin Alkali and Bokaro Steel principle continues to govern such cases.

Sections Involved

  • Income Tax Act, 1961
    • Section 56 (Income from Other Sources)
    • Principles relating to Capital vs Revenue Receipts
  • Judicial interpretation of capitalization of income during project construction

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2183-DB/MMH01062022ITA1772022_191050.pdf

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