The Delhi Bench of Income Tax Appellate Tribunal(ITAT) restored the matter to the Commissioner of Income Tax(Appeals)[CIT(A)] for fresh adjudication on the taxability of pre-commencement interest income under Section 56 of the Income Tax Act,1961.
The Revenue-appellant, appealed against the order dated 28.12.2018 passed by CIT(A) for the assessment year 2016-17 challenging the decision in favor of MB Power respondent-assessee. The Revenue argued that the interest income of Rs. 7,64,07,627/- earned before business commencement was taxable under Section 56 of the Act and contended that the CIT(A) erred in disregarding Supreme Court rulings in Tuticorin Alkali Chemicals and Coromandel Cement.
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The CIT(A) reversed the assessment findings that had treated the interest income of ₹7,13,12,467 from fixed deposits as taxable under “income from other sources.” The Assessing Officer (AO) had relied on the Supreme Court’s ruling in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT, arguing that interest earned before the commencement of business should be taxed separately.
However, the CIT(A) noted that the fixed deposits were used as margin money for bank guarantees and security deposits required for setting up the power project. Relying on Supreme Court rulings in CIT v. Bokaro Steel Ltd. and CIT v. Karnal Co-operative Sugar Mills Ltd., it was held that such interest was inextricably linked to the business setup and should be treated as a capital receipt. Since the facts were similar to earlier years, the addition made by the AO was deleted.
Both sides reiterated their arguments, with the Revenue supporting the taxability of interest income and the taxpayer relying on the CIT(A)’s findings. The tribunal noted that the CIT(A) had referred to past assessments, and a coordinate bench had sent the issue back to the CIT(A.) in an August 3, 2022, order with specific directions.
The taxpayer’s counsel argued that business operations had started in the relevant year, making the case different. He cited Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 315 ITR 255 (Del) to refute the Revenue’s claim.
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The two member bench comprising Satbeer Singh Godara(Judicial Member) and M.Balaganesh(Accountant Member) noted that the issue had already been sent back to the CIT(A) by the coordinate bench. It found that the CIT(A) had followed past rulings from assessment years 2013-14 and 2014-15.
To ensure a fair decision, the tribunal restored the matter to the CIT(A) for fresh adjudication, allowing the taxpayer to present all relevant arguments, which must be considered after a proper hearing.
In short,the appeal filed by the revenue was allowed.
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