Capital or revenue receipt – A. Y. 2009-10 – Money to be used in purchase of plant and machinery temporarily placed in fixed deposits – Inextricably linked with setting up of plant – Interest on fixed deposits is capital receipt

In the A. Y. 2009-10, the assessee received an amount of Rs. 70,75,843/- from the bank as interest on fixed deposits but did not declare that amount in the return. Instead the assessee reduced the interest amount from the capital work-in-progress. The assessee claimed that it is a capital receipt and not income. The Assessing Officer rejected the claim of the assessee and made an addition of Rs. 70,75,843/- as “income from other sources”. The Tribunal allowed the assesee’s claim and deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The test that is required to be employed is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the business.

ii) The findings of fact had been returned by the Commissioner(Appeals) and had been confirmed by the Tribunal to the effect that the funds were inextricably connected with the setting up of the power plant of the assessee. The Revenue had also not been able to point out any perversity in such finding and, therefore, the factual findings had to be taken as those accepted by the Tribunal which is the final fact finding authority in the income-tax regime.

iii) Thus, the revenue generated on account of interest on the fixed deposits would be in the nature of capital receipt and not a revenue receipt.”