Facts of the Case

The assessee, International Coal Ventures Pvt. Ltd., was incorporated as a special purpose vehicle by five public sector undertakings to acquire coal mines overseas and ensure coal supply to its promoters. During Assessment Year 2012–13, the assessee received substantial funds from its promoters, particularly an advance of ₹156 crore from Rashtriya Ispat Nigam Limited (RINL), for the purpose of acquiring a coal mine overseas.

Pending completion of the acquisition process, the funds were temporarily parked in short-term fixed deposits with banks, which yielded interest of ₹11,45,92,550/-. The assessee also paid interest of ₹11,14,73,651/- to RINL on the borrowed funds. The acquisition ultimately did not materialise and the principal amount was refunded to RINL along with interest.

The Assessing Officer treated the net interest income of ₹31,18,900/- as taxable income under the head “Income from Other Sources”. The CIT(A) enhanced the addition by holding the gross interest income taxable and disallowing the interest paid as deduction under Section 57(iii). The ITAT allowed the assessee’s appeal, holding the interest income to be capital in nature and adjustable against Capital Work-in-Progress (CWIP).

Issues Involved

Whether interest earned on funds specifically raised and earmarked for acquisition of a capital asset, but temporarily parked in fixed deposits during the pre-commencement period, is taxable as “income from other sources” under Section 56 or constitutes a capital receipt adjustable against CWIP.

Petitioner’s Arguments (Revenue)

The Revenue contended that the funds placed in fixed deposits constituted surplus funds and, therefore, interest earned thereon was taxable as revenue income under Section 56. Reliance was placed on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, arguing that interest earned prior to commencement of business is taxable as income from other sources.

Respondent’s Arguments (Assessee)

The assessee argued that the funds were not surplus but were specifically called for and earmarked for acquisition of a coal mine, a capital asset requiring substantial time to bring into existence. It was contended that the interest earned was inextricably linked to the acquisition of the capital asset and, following Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd., such interest must be treated as capital receipt and adjusted against CWIP.

Court Order / Findings

The Delhi High Court held that the decisive test is whether the funds were surplus or were inextricably linked to the acquisition of a capital asset. The Court found that the assessee was incorporated solely to acquire and operate a coal mine and that the funds received from promoters were specifically earmarked for that purpose.

The Court distinguished Tuticorin Alkali Chemicals on facts, noting that in that case the interest was earned on surplus funds, whereas in the present case the funds were not surplus but temporarily parked pending utilisation for acquisition of a capital asset. Relying on Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd., the Court held that interest earned in such circumstances is a capital receipt.

The Court further observed that accounting principles and settled jurisprudence permit adjustment of such interest against the capital cost or CWIP where the asset requires substantial time to be brought into use.

Important Clarification

The Court clarified that the treatment of interest as capital receipt applies only where the funds are specifically borrowed or raised for acquisition or construction of a capital asset that requires time to be brought into use. Interest earned on genuinely surplus funds or on funds used for off-the-shelf assets would continue to be taxable as revenue income.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court answered the question of law in favour of the assessee, holding that the interest earned on funds temporarily parked in fixed deposits, which were earmarked for acquisition of a coal mine, is a capital receipt to be adjusted against CWIP and is not taxable as income from other sources.

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769841123_PR.COMMISSIONEROFINCOMETAX4VsINTERNATIONALCOALVENTURESPVT.LTD..pdf

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