Interest from Bank Deposits prior to the period of Commencement of Business is Capital Receipt: ITAT Chandigarh [Read Order]


In a recent ruling, the ITAT Chandigarh held that the interest from Bank deposits prior to the period of commencement of the business is Capital receipt. It further allowed the assesses’ claim to set off the interest so received on short term deposit during the year on the loan received against the interest payable on PFC loan so as to reduce the cost of project.

Assessee, Beas Valley Power is a Government Company promoted by HPSEBL to execute the 100 MW UHL Stage -III in Joginder Nagar Distt. Mandi. While completing the assessment against the assessee- Company, the AO noted that the interest on bank deposits earned by the Company before the commencement of business is a taxable income and should have be shown under the head ” Income from other sources”.

Assessee maintained that it was at construction stage and there was no source of income in view of which the amount was kept in short term deposits in the bank. The Officer further rejected their claim of setting off the interest income against the interest payable on PFC loan so as to reduce the cost of project.

AO relied upon the decision of the Apex Court in Tuticorin Alkali Chemicals & Fertilizers wherein it was held that interest earned on bank deposits during the pre-construction period was assessee’s “income from other sources”.

However, the first appellate authority granted relief to the assessee.

The bench relied on the decisions of the Coordinate Benches in ITA 857/CHD/2012 A.Y. 2009-10 dated 31.12.2014 and ITA 1132/CHD/2014 A.Y. 2011-12 dated 23.09.2015, wherein the Tribunal, considering the peculiar facts of the case, held that “the funds with the assessee, even if temporarily used for savings/short term deposits, but the earning of the interest were directly connected with work of construction of the project employed by the assessee. Therefore, the earning of interest could not be treated as income from other sources, since the income was earned in the period prior to commencement of the business and it was the nature of capital receipt and was required to be set off against pre-operative expenses.”

Following the above decisions, the Tribunal dismissed the departmental appeal.

Read the full text of the Order below.