Interest Received on FDRs/ICDs with Bank/NBFCs made out of Unutilized Funds which could not be used in development of Port Terminal is Capital Receipt: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in the case of M/s. Karanja Terminal and Logistics Pvt. Ltd. held that interest received on FDRs/ICDs with bank/NBFCs made out of unutilized funds which could not be used in the development of port terminal is the capital receipt and hence is not taxable.

The assessee company was incorporated to develop, operate a multipurpose port terminal at Karanja Creek, Maharashtra. For the purpose of the port terminal project, the assessee raised share capital as foreign inward remittance from a Cypriot Intermediate company. The capital was raised as an IPO for the specific purpose of developing a multipurpose port terminal facility and logistics facility at Karanja Creek. However, the port terminal could not be developed as envisaged and planned and hence the funds received from IPO were put in fixed deposits and ICDs till the resumption of work. Further, interest was received on such deposits, it was treated as capital in nature and no return for income was filed by the assessee.

The assessee filed his nil return when was notice issued and submitted before the Assessing Authority (‘AO’) that the interest received on FDR/ICDs with banks and NBFC being a capital receipt is not liable to income tax. He further submitted that even if the interest was credited to the profit and loss account resulting into book profit during the year would not change the character of the receipt from capital to revenue and cannot be taxed both under normal provisions and under Section 115JB of the Income Tax Act. The AO rejected the contentions of the assessee and similar findings were drawn by the Commissioner of Income Tax (Appeals) (CIT(A))

The assessee has challenged the order of the CIT(A) on the ground that Interest of Rs. 44.45 Cr has wrongly been held to be a revenue receipt by ignoring the fact that the interest was received on FDRs/ICDs during the period prior to the commissioning of the port terminal at Karanja Creek which has to be reduced from the pre-operative capital expenditure as the development of the port is still under progress and not commissioned.

The Bench constituting of Hon’ble members Shri Rajesh Kumar as the accountant member and Shri Ramlal Negi as the judicial member held that “the interest income received by the assessee from the FDRs/ICDs made out of funds are inextricably linked to the development of port terminal and other infrastructure at Karanja Creek which is yet to be completed and commissioned. We would like to add that the these funds could not be used for the development work of the port due to late issuance of permissions/clearances by the Govt authorities and also due to some local issues. Therefore, in our considered view the interest income is a capital receipt and is not taxable at all both under the normal provisions of the Act as well as u/s 115JB of the Act. The appeal of the assessee is allowed.”