Case Law : Principal CIT Vs. Facor Power Ltd

LEGAL CORNER – February 2016 – CASE LAW 2

Topic:

Interest on idle funds mainly brought for capital expansion can be set off against pre-operative expenses.

Facts of the Case:

• The assessee company was incorporated on 24.08.2005 to carry on in India or elsewhere the business to generate, receive, produce, improve, buy, sell etc. electric power by establishing thermal power plants, atomic power plants etc..
• In the year under consideration, no business activity was carried out by the assessee as the project was under implementation.
• The Assessing Officer (AO) had noted that the assessee had received an amount of Rs.70,75,843/- from State Bank of Mysore as interest on fixed deposits but that the said amount was not declared in the return of income as ‘income from other sources’.
• Assessing Officer also noted that the assessee had reduced the said interest amount from the capital work in progress.
• The assessee said that it had earned interest on FDRs which were placed with the bank as margin money for procurement of various capital goods for setting up of the power project.

Appeal was made by Assessee to CIT (A)

CIT (A) allowed the appeal of the assessee and deleted the addition made by AO.

Appeal was made by AO to ITAT

Decision of ITAT

• ITAT upheld the order of CIT (A).
• It was held that the interest income earned by the assessee in the pre-commencement period could not be stated to be ‘income from other sources’.

Appeal was made to High Court

Decision of High Court

• In one of the the decisions of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC) and CIT v. Bokaro Steel Limited: (1999) 236 ITR 315 and held that the funds in the form of share capital were infused for a specific purpose of acquiring land and the development of infrastructure. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources.
• Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through the raising of share capital and not through borrowings.

Accordingly, appeals of revenue were dismissed.