Interest earned by a Company from fixed deposit furnished as Bank Guarantee to obtain License is a “Capital Receipt”: ITAT Mumbai [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal, has recently ruled that the amount of interest received by a company from its fixed deposit account which was made by it for the purpose of furnishing it as a bank guarantee to obtain license is need to be considered as “capital receipt” and therefore, such income is not taxable under the Income Tax Act, 1961. The Tribunal was considering an appeal filed by the Revenue against the assessee, a telecom company. The facts of the case are as discussed below.

The assessee is a company engaged in the telecom services. The assessee, for the relevant assessment year, has filed return by claiming deduction of amount received as interest from fixed depositwith the Department of Telecommunication for obtaining Telecom Licenses for the reason that the said amount falls in the category of “project development cost”. The Assessing Officer completed the assessment by disallowing the above claim and held that the amount is liable to be charged under the head “Income from Other Sources.”

On appeal, the assessee maintained that it had returned its entire interest income,that it had excluded that component which was the result of the direct deployment of its fund in margin money is placed with the banks for obtaining bank guarantees which were necessary for Telecom licenses, that the funds in question were directly deployed for the purpose of commencement of its business,that the resultant interest receipt would have to be reduced from the project development cost.

The First Appellate Authority decided in favour of the assessee by relying on the decision of the Supreme Court in Karnal Co-Operative Sugar Mills Ltd.(243 ITR 2) in which it was held that interest received by the assessee on the margin monies placed in FD.s with the banks for obtaining bank guarantees for fulfilling the preconditions laid down for issue of Telecom licenses was a capital receipt and hence not chargeable to tax. Being aggrieved, the Revenue preferred an appeal before the Appellate Tribunal.

The Tribunal found that the assesseehad to furnish performance bank guarantee as well as financial bank guarantee for the purpose of obtaining license. Therefore,the interest earned by the assessee was for fulfilling the preconditions laid down for issue of Telecom licenses.

Based on the above findings, the Tribunal observed that “In our opinion, he had rightly held that it was a capital receipt and same had to be set off against project development expenses.We also hold that his order does not suffer from any legal infirmity. Therefore, upholding his order, we decide the effective ground of appeal against the AO.”

Read the full text of the order below.