The Delhi High Court has held that interest on funds deposited in short-term fixed deposits can be construed as incidental to acquisition of coal mine.
The bench of Acting Chief Justice Vibhu Bakhru and Swarana Kanta Sharma has observed that the interest received on borrowed funds, which were temporarily held in interest bearing deposit, is a part of the capital cost and is required to be credited to Capital Work-in-Progress (CWIP).
The bench noted that if the interest is earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up its business, the interest earned would require to be accounted for as the part of the capital value of the business/asset.
The bench stated that the accounting treatment is or will be applicable only if the nature of the asset is such that requires time for construction or for putting it in use. Illustratively, the same would be applicable where the asset is to be constructed, developed or is of a nature that requires considerable time to bring it to use. Illustratively, in case where a plant is being set up in a factory and the requisite funds for setting up the same are deployed for a period of time, the interest paid on the amount borrowed for the said purpose and interest earned on temporary deposits during the course of deployment are required to be accounted for as a part of the capital costs. However, this is not true for an off the shelf product.
The bench while giving illustration stated that if a motor vehicle is purchased from borrowed capital, neither the interest paid nor the interest earned on the funds borrowed for payment of consideration of the same can be accounted for as a part of the cost of the asset.
The controversy involved in the appeal relates to the addition of Rs. 31,18,900 made by the Assessing Officer to the declared income of the Assessee. The Assessee had filed its Income Tax Return for the relevant AY 2012-13 declaring its income as NIL.
During the course of the assessment proceedings, the AO noticed that the Assessee had earned an amount of Rs. 11,45,92,550 in respect of the funds received from its promoters.
The Assessee had also paid interest to its promoters amounting to Rs. 11,14,73,651. According to the AO, the difference between the interest earned and interest paid was chargeable to tax as ‘income from other sources’. The AO passed the assessment order determining the Assessee’s total income at Rs.31,18,900.
The Assessee filed an appeal before the CIT(A) claiming that it was entitled to set off the interest earned against the amounts capitalized as ‘Capital Work-in-Progress’ (CWIP). The CIT(A) rejected the contention holding that the interest was in the nature of ‘revenue receipt’ and not a ‘capital receipt’ and therefore, it was required to be accounted for and taxed accordingly.
The CIT(A) concluded that the amount earned on short term deposits was chargeable to tax under the head ‘income from other sources’ in terms of Section 56 of the Income Tax Act.
The CIT(A) was also of the view that the AO had erred in permitting a deduction in respect of amount paid by the Assessee to promoters as interest, for determining the net amount that was chargeable to tax under Section 57(iii) of the Income Tax Act. The CIT(A) held that a deduction under Section 57(iii) of the Income Tax Act was not permissible in respect of the interest payable on funds received from the Assessee’s promoters as that expenditure could not be considered as incurred ‘wholly or exclusively’ for the purpose of earning interest income from short term deposits. Accordingly, the CIT(A) determined the Assessee’s taxable income at Rs. 11,58,59,615/-.
The Assessee assailed the CIT(A)’s order dated 17.05.2017 before the learned ITAT, which was allowed in terms of the impugned order. The learned ITAT held that the Assessee had received funds from its promoters in furtherance of its business for acquiring a coal mine overseas.
Therefore, the Assessee was entitled to set off the interest paid against the interest received and the balance receipt against CWIP. The ITAT held that the interest earned from the deposit was not chargeable to tax under the head income from other sources and accordingly, set aside the order of the CIT(A) as well as the AO.
The issue raised was whether the interest income earned on surplus fund deposited in the bank during pre-commencement of the business is liable to be taxed under Section 56 of the Income Tax Act, 1961.
The assessee contended that income by way of interest is not chargeable to tax under the head ‘income from other sources’ as it was inextricably linked to acquisition of coal mine – a capital asset.
The Assessee claimed that the amount of interest payable on the funds borrowed for acquiring such asset is required to be added to the total cost of the asset. Similarly, interest on such funds, which were temporarily kept in an interest-bearing account pending utilization, was liable to be adjusted from the cost of such assets.
The court held that the question of law as framed refers to the funds deposited in interest bearing account as ‘surplus funds’. However, the funds in question were not surplus funds but funds that were called for and earmarked for a specific purpose of acquiring a coal mine. To that extent the use of the term ‘surplus’ in respect of the funds, in the question of law as framed, is not apposite and ought to be deleted. The question of law as modified is answered in favour of the Assessee and against the department.
Case Details
Case Title: PCIT Versus International Coal Ventures Pvt. Ltd
Case No.: ITA 1174/2018
Date: 20.12.2024
Counsel For Appellant: Sanjay Kumar
Counsel For Respondent: Divyanshu Agarwal
