In ITA No. 308/DEL/2016 – ITAT - Interest earned on short-term fixed deposits by Kanpur Fertilizers & Cement Ltd. inextricably linked to project revival, considered as capital receipt: ITAT (Delhi)
Members Kul Bharat (Judicial) & Pradip Kumar Kedia (Accountant) [30-05-2023]

Read Order: Kanpur Fertilizers & Cement Ltd v. Income Tax Officer

Chahat Varma

New Delhi, June 1, 2023: In a relief to Kanpur Fertilizers & Cement Ltd. (assessee), the Delhi bench of the Income Tax Appellate Tribunal has directed the Assessing Authority (AO) to delete the disallowance, holding that the interest earned by the assessee from the short-term fixed deposits with scheduled banks, being inextricably linked to the project, was a capital receipt, that reduced the project’s cost and accordingly, the assessee had correctly reduced the same from the cost of expenditure on the project.

In the present case, the AO while framing the assessment, noticed that the assessee in its account had shown pre-operative expenditure of Rs. 54,37,00,000/- and out of which the interest received on short-term deposits with scheduled banks was deducted, amounting to INR 1,93,75,802/-. The explanation of the assessee was not found acceptable and this amount was added into the income of the assessee under the head income from other sources. Aggrieved against this, the assessee preferred an appeal before the CIT(Appeals), who also sustained the addition.

The bench referred to the judgment of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Ltd v. Income Tax Officer [LQ/DelHC/2009/4960], to analyze whether the interest earned on term deposits could be considered ‘inextricably linked’ to the revamping or renovating of a sick unit.

The bench took note of the arguments put forth by the counsel representing the assessee, wherein the counsel highlighted that the amount in question was incurred on the project and referred to the balance sheet, that it was being utilized for renovating and revamping a sick industrial unit. Additionally, the counsel pointed out that the assessee had issued bank guarantees to Indian Oil Corporation and state governments against the FDR, amounting to INR 1417 lakh and INR 7.50 lakh respectively. The bench held that this information demonstrated that the interest income earned by the assessee was inextricably linked to the revival of the project.

The bench also referred to the decision rendered in ITO vs. M/s Adani Power Rajasthan Limited [LQ/ITAT/2019/1205], wherein the Tribunal was in complete agreement with the action of the CIT(A) in upholding the action of AO to reduce interest income arising from deposits placed with SBI out of project development expenditure.