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Tax Publishers Interest earned during construction period--Taxability thereof *Facts:* Assessee was an infrastructure SPV incharge of building and maintaining an express highway. Arising out of loan commitments an escrow account was opened for project operations. Surplus money lying out of the borrowing was invested in fixed deposits and interest income arose from the same. Assessee offered both the interest income and the interest expense as income from business or profession citing that the interest incomes was inextricably connected to the interest expense on the project. CIT(A) held that the interest income was to be taxed as income from other sources and the interest expenditure was to be added as part of Capital work in progress citing Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC). Assessee's appeal before ITAT was since the surplus monies arose out of business it was business income. On the contrary if the expense was to be treated as Capital work in progress then the interest income as well be treated as part of reducing the Capital work in progress. Held in favour of the assessee, the test for taxability of interest income is two fold. If it is inextricably connected to the business then it will partake business income or reduce the CWIP especially if it was received in the pre-construction stage (as in the case of the assessee). Alternatively it will be treated as income from other sources if the above nexus does not exist. *Applied:* Hazaribagh Expressway Ltd. v. Income Tax Officer in I.T.A. No. 6696/Mum/2017, dated 22-1-2020 Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 181 Taxman 249 (Del) : (2009) 315 ITR 255 (Delhi High Court) : 2009 TaxPub(DT) 1494 (Del-HC) The Road Infrastructure Development Company of Rajasthan Ltd. in I.T.A. No. 628/JP/2014 Jaipur : 2016 TaxPub(DT) 4221 (Jp-Trib) Andhra Pradesh Expressway Ltd. in I.T.A. No. 663/M/2015 Karnataka Power Corporation Ltd. (2001) 247 ITR 268 (SC) : 2001 TaxPub(DT) 0524 (SC) Pr. Commissioner of Income Tax v. Facor Power Ltd. (2016) 66 taxmann.com 178 (Delhi) : 2016 TaxPub(DT) 1063 (Del-HC) Adani Power Ltd. v. Assistant Commissioner of Income Tax, Range-1, Ahmedabad (2015) 61 taxmann.com 355 (Ahmedabad-Trib.) : 2015 TaxPub(DT) 3050 (Ahd-Trib) Commissioner of Income Tax v. Kansara Modler Ltd. (2012) 20 taxmann.com 641 (Raj.) *Distinguished:* Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC) CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) : 1999 TaxPub(DT) 1094 (SC) Bongaigaon Refinery and Petrochemicals Ltd. v. CIT (2001) 119 Taxman 488 (SC) : 2001 TaxPub(DT) 1536 (SC) *Ed. Note:* Reference was also made to section 56(2)(id) which says that interest income if not taxed as business income is what is taxable as income from other sources + the plea that the Tuticorin case pertains to assessment year 1982-83 when this section was not in the statute was also an argument adopted by assessee. However subsequent decisions of Bokaro and Bongaigaon (supra) have considered this section as well in their verdict. Thus it cannot be said that Tuticorin verdict has a view which is contrary to this section. *Case:* SP Jammu-Udhampur Highway (P) Ltd. v. DCIT 2023 TaxPub(DT) 152 (Mum-Trib)

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Interest earned during construction period--Taxability thereof

Facts:

Assessee was an infrastructure SPV incharge of building and maintaining an express highway. Arising out of loan commitments an escrow account was opened for project operations. Surplus money lying out of the borrowing was invested in fixed deposits and interest income arose from the same. Assessee offered both the interest income and the interest expense as income from business or profession citing that the interest incomes was inextricably connected to the interest expense on the project. CIT(A) held that the interest income was to be taxed as income from other sources and the interest expenditure was to be added as part of Capital work in progress citing Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC). Assessee's appeal before ITAT was since the surplus monies arose out of business it was business income. On the contrary if the expense was to be treated as Capital work in progress then the interest income as well be treated as part of reducing the Capital work in progress.

Held in favour of the assessee, the test for taxability of interest income is two fold. If it is inextricably connected to the business then it will partake business income or reduce the CWIP especially if it was received in the pre-construction stage (as in the case of the assessee). Alternatively it will be treated as income from other sources if the above nexus does not exist.

Applied:

Hazaribagh Expressway Ltd. v. Income Tax Officer in I.T.A. No. 6696/Mum/2017, dated 22-1-2020

Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 181 Taxman 249 (Del) : (2009) 315 ITR 255 (Delhi High Court) : 2009 TaxPub(DT) 1494 (Del-HC)

The Road Infrastructure Development Company of Rajasthan Ltd. in I.T.A. No. 628/JP/2014 Jaipur : 2016 TaxPub(DT) 4221 (Jp-Trib)

Andhra Pradesh Expressway Ltd. in I.T.A. No. 663/M/2015

Karnataka Power Corporation Ltd. (2001) 247 ITR 268 (SC) : 2001 TaxPub(DT) 0524 (SC)

Pr. Commissioner of Income Tax v. Facor Power Ltd. (2016) 66 taxmann.com 178 (Delhi) : 2016 TaxPub(DT) 1063 (Del-HC)

Adani Power Ltd. v. Assistant Commissioner of Income Tax, Range-1, Ahmedabad (2015) 61 taxmann.com 355 (Ahmedabad-Trib.) : 2015 TaxPub(DT) 3050 (Ahd-Trib)

Commissioner of Income Tax v. Kansara Modler Ltd. (2012) 20 taxmann.com 641 (Raj.)

Distinguished:

Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC)

CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) : 1999 TaxPub(DT) 1094 (SC)

Bongaigaon Refinery and Petrochemicals Ltd. v. CIT (2001) 119 Taxman 488 (SC) : 2001 TaxPub(DT) 1536 (SC)

Ed. Note: Reference was also made to section 56(2)(id) which says that interest income if not taxed as business income is what is taxable as income from other sources + the plea that the Tuticorin case pertains to assessment year 1982-83 when this section was not in the statute was also an argument adopted by assessee. However subsequent decisions of Bokaro and Bongaigaon (supra) have considered this section as well in their verdict. Thus it cannot be said that Tuticorin verdict has a view which is contrary to this section.

Case: SP Jammu-Udhampur Highway (P) Ltd. v. DCIT 2023 TaxPub(DT) 152 (Mum-Trib)