Interest on Deposits made out of Share Application Money during the Period of Construction of Plant is not Taxable: ITAT [Read Order]

The interest received on deposits made out of share application money during the period of construction of plant constitutes capital receipt and therefore, is not taxable under the provisions of the Income Tax Act, 1961, said Bangalore bench of the Income Tax Appellate Tribunal (ITAT), on Friday.

In the instant case the assessee, a joint venture with another private company engaged in the business of developing, designing, manufacturing and supplying currency paper and bank note paper, has commenced the process of setting up of a plant for manufacture of paper and filed its return of income declared as nil during the assessment year.

During the assessment proceedings, the Assessing Officer made an addition of Rs.17,01,72,084/- in respect of interest earned by the assessee on fixed deposits made with various banks out of share capital/application money invested by RBI. According to him, the interest income is chargeable to tax under the head ‘income from other sources’ and the aforesaid interest is taxable.

The assessee argued that the funds were temporarily deposited in the bank for meeting the capital expenses and owing to the financial planning and depending on the requirement of funds at given intervals/time schedule and it is not the surplus fund. The assessee has deposited in the bank with a view to meet their time to time financial requirements and also submitted the relevant documents and records before the bench.

The bench comprising of Judicial Member Sunil Kumar Yadav and Accountant Member Jason P Boaz relying upon the judgments of identical cases hold by the Supreme Court, observed that if the assessee receives any amount which are separately linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. It was noted that these are receipts of capital nature and cannot be taxed as income.

The bench also accepted the contention of the assessee that the relevant records which reflected that the deposit made in the bank is only for a temporary period for meeting the financial requirements of the company. It was held that the said interest earned on deposits should only go to reduce the capital cost of the plant project being set up by the assessee company hence the interest amount would not be taxable in the hands of the assessee.