The Income Tax Appellate Tribunal (ITAT), Allahabad Bench held that the no tax is applicable on the interest income linked with the power plant set up as it is capital receipt.
The assessee, M/s Meja Urja Nigam Pvt. Ltd. is aggrieved by the decision of CIT(A) in upholding the addition made by Assessing Officer to the tune of Rs. 1,91,40,000 on account of receipts being forfeiture of earnest money and other miscellaneous recoveries from contractors which were held to be taxable in the hands of assessee under the head ‘income from other sources’ under section 56 of the 1961 Act.
The contractors have given earnest money (EMD) to the assessee and since they could not complete the work in time the assessee has forfeited the amount, and also there were miscellaneous recoveries from contractors. The commercial operations of the power plant have not yet commenced during the impugned day and the project is under implementation.
The issue raised was whether the CIT(A) has erred in law and on facts in upholding the addition of Rs. 1,91,40,000, being forfeiture of earnest money and other miscellaneous recoveries from contractors as income from other sources because the said receipts are inextricably linked with the plant set up activities and hence is in the nature of Capital Receipt and are being set off against Expenditure during the construction period.
The coram consisting of Vijay Pal Rao and Ramit Kochar relied on the decision of the Supreme Court wherein it was held that if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.
Therefore, the Tribunal held that while reversing the order of the CIT(A) held that these are capital receipts and they cannot be brought to tax and shall go on to reduce the cost of the project.
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