Facts of the Case

  • The assessee, M/s Triumph Realty Pvt. Ltd., obtained an External Commercial Borrowing (ECB) loan of ₹82.37 crores for acquisition and renovation of a hotel property under the SARFAESI Act.
  • During the relevant Assessment Year 2012–13, only ₹33.70 crores could be utilized.
  • The unutilized funds were temporarily parked in Fixed Deposit Receipts (FDRs) in compliance with RBI guidelines.
  • The assessee:
    • Paid interest of ₹13.38 crores
    • Earned interest of ₹4.03 crores on FDRs
  • The net interest of ₹9.35 crores was capitalised as pre-operative expenditure.
  • The ITAT allowed such capitalization, which was challenged by the Revenue before the Delhi High Court.

Issues Involved

  1. Whether interest earned on FDRs from temporarily parked borrowed funds should be treated as:
    • Capital receipt (to be capitalised) OR
    • Income from other sources (taxable)
  2. Whether the ITAT erred in allowing capitalization of such interest.
  3. Whether any substantial question of law arises under Section 260A of the Income Tax Act, 1961.

 Petitioner’s Arguments (Revenue)

  • The ITAT wrongly allowed capitalization of interest earned on FDRs.
  • The assessee allegedly did not comply with RBI guidelines in utilizing ECB funds.
  • Reliance was placed on:
    • Tuticorin Alkali Chemicals and Fertilizers Ltd. vs CIT (1997) 227 ITR 172 (SC)
      → Interest income should be taxed as “Income from Other Sources”.

Respondent’s Arguments (Assessee)

  • The borrowed funds were inextricably linked to acquisition and renovation of capital assets.
  • Temporary parking of funds in FDRs was:
    • Necessary
    • In compliance with RBI guidelines
  • The interest earned was incidental to project execution, hence:
    • Should reduce project cost
    • Be treated as capital receipt, not taxable income

Court’s Findings / Judgment

  • The Court relied on the principle laid down in:
    • CIT vs Bokaro Steel Ltd. (1999) 1 SCC 645
    • Indian Oil Panipat Power Consortium Ltd. vs ITO (2009) 315 ITR 255 (Delhi)
    • PCIT vs Facor Power Ltd. (2016) 380 ITR 474 (Delhi)
  • Held that:
    • If income is inextricably linked to setting up of a project, it is capital in nature.
    • Interest earned during pre-operative period reduces cost of assets.
  • Distinguished:
    • Tuticorin Alkali case → Applicable where funds are not linked to project setup.
  • Final observation:
     No substantial question of law arises.     

Important Clarification

  • Interest earned on temporarily parked funds:
    If linked to capital project → Capital receipt (to be capitalised)
     If independent surplus funds → Taxable as income
  • The key test:
    “Inextricable link with project setup”

Sections Involved

  • Section 260A – Appeal to High Court
  • Income Tax Act, 1961
  • Principles relating to:
    • Capital vs Revenue receipt
    • Income from Other Sources

 Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:1159-DB/MMH31032022ITA702022_231124.pdf

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