Interest earned during construction
period--Taxability thereof
Facts:
Assessee was an infrastructure SPV incharge of building and
maintaining an express highway. Arising out of loan commitments an escrow
account was opened for project operations. Surplus money lying out of the
borrowing was invested in fixed deposits and interest income arose
from the same. Assessee offered both the interest income and the
interest expense as income from business or profession citing that the
interest incomes was inextricably connected to the interest expense on the
project. CIT(A) held that the interest income was to be taxed as income
from other sources and the interest expenditure was to be added as part of
Capital work in progress citing Tuticorin Alkali Chemicals & Fertilizers
Ltd. v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC). Assessee's
appeal before ITAT was since the surplus monies arose out of business it
was business income. On the contrary if the expense was to be treated as
Capital work in progress then the interest income as well be treated as part of
reducing the Capital work in progress.
Held in favour of the assessee, the test for taxability of
interest income is two fold. If it is inextricably connected to the
business then it will partake business income or reduce the CWIP especially if
it was received in the pre-construction stage (as in the case of the assessee).
Alternatively it will be treated as income from other sources if the above
nexus does not exist.
Applied:
Hazaribagh Expressway Ltd. v. Income Tax Officer in
I.T.A. No. 6696/Mum/2017, dated 22-1-2020
Indian Oil Panipat Power Consortium Ltd. v. ITO (2009)
181 Taxman 249 (Del) : (2009) 315 ITR 255 (Delhi High Court) : 2009 TaxPub(DT)
1494 (Del-HC)
The Road Infrastructure Development Company of Rajasthan
Ltd. in I.T.A. No. 628/JP/2014 Jaipur : 2016 TaxPub(DT) 4221 (Jp-Trib)
Andhra Pradesh Expressway Ltd. in I.T.A. No. 663/M/2015
Karnataka Power Corporation Ltd. (2001) 247 ITR 268 (SC)
: 2001 TaxPub(DT) 0524 (SC)
Pr. Commissioner of Income Tax v. Facor Power Ltd.
(2016) 66 taxmann.com 178 (Delhi) : 2016 TaxPub(DT) 1063 (Del-HC)
Adani Power Ltd. v. Assistant Commissioner of Income
Tax, Range-1, Ahmedabad (2015) 61 taxmann.com 355 (Ahmedabad-Trib.) :
2015 TaxPub(DT) 3050 (Ahd-Trib)
Commissioner of Income Tax v. Kansara Modler Ltd. (2012)
20 taxmann.com 641 (Raj.)
Distinguished:
Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT
(1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC)
CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) : 1999
TaxPub(DT) 1094 (SC)
Bongaigaon Refinery and Petrochemicals Ltd. v. CIT
(2001) 119 Taxman 488 (SC) : 2001 TaxPub(DT) 1536 (SC)
Ed. Note: Reference
was also made to section 56(2)(id) which says that interest income if not taxed
as business income is what is taxable as income from other sources + the
plea that the Tuticorin case pertains to assessment year 1982-83 when
this section was not in the statute was also an argument adopted by assessee.
However subsequent decisions of Bokaro and Bongaigaon (supra)
have considered this section as well in their verdict. Thus it cannot be said
that Tuticorin verdict has a view which is contrary to this
section.
Case: SP
Jammu-Udhampur Highway (P) Ltd. v. DCIT 2023 TaxPub(DT) 152 (Mum-Trib)