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Facts
The assessee, a real estate developer, earned interest income of Rs. 37,58,095/- on fixed deposits. The assessee capitalized this income to work-in-progress, arguing it was linked to a mandatory bank guarantee for an SRA project. The Assessing Officer treated it as income from other sources, as the project's Letter of Intent was cancelled. The CIT(A) confirmed the addition, holding the interest was on idle funds.
Held
The Tribunal held that the fixed deposits were not surplus funds but a mandatory requirement for a bank guarantee related to a project that was legally subsisting. The interest income was inextricably linked to the project and should be capitalized to work-in-progress, distinguishing from cases of idle fund investments.
Key Issues
Whether interest earned on fixed deposits, maintained as a mandatory bank guarantee for a real estate project, is to be treated as income from other sources or capitalized to work-in-progress, especially when the project's termination is sub-judice.
Sections Cited
250, 143(3), 56, 270A, 115BBE
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “SMC” BENCH MUMBAI
आदेश / ORDER
PER MAKARAND VASANT MAHADEOKAR, AM:
1. This appeal filed by the assessee is directed against the order dated 13.10.2025 passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi[hereinafter referred to as "CIT(A)"], under section 250 of the Income-tax Act, 1961[hereinafter referred to as "the Act"], arising
Shreenath Realtors out of the assessment order dated 17.12.2019 passed by the Assessing Officer under section 143(3) of the Act for Assessment Year 2017–18. Facts of the Case 2. The assessee is a partnership firm engaged in the business of real estate development. The return of income for the year under consideration was filed on 30.07.2017 declaring total loss of Rs. 2,08,850/-. The case was selected for scrutiny and the assessment was completed under section 143(3) of the Act on 17.12.2019 determining total income at Rs. 35,49,250/-.
During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned interest income of Rs. 37,58,095/- on fixed deposits maintained with Union Bank of India. The assessee had not offered the said income to tax but had capitalised the same to work-in-progress of its real estate project. On examination of the records, the Assessing Officer observed that the assessee had been allotted a Slum Rehabilitation Project at Nirmal Nagar by the Slum Rehabilitation Authority (SRA) and had furnished a bank guarantee backed by fixed deposits. However, the Letter of Intent issued by SRA was subsequently cancelled and the appointment of the assessee as developer stood terminated. The Assessing Officer further noted that SRA had communicated to the bank for release of the bank guarantee and, therefore, according to him, the project had effectively ceased.
Shreenath Realtors 4. In view of the above, the Assessing Officer held that there was no ongoing business activity during the year and the fixed deposits had no direct nexus with any active project. Accordingly, the interest income earned thereon was treated as income from independent sources and brought to tax under the head “Income from Other Sources” under section 56 of the Act. The amount of Rs. 37,58,095/- was added to the income of the assessee and the assessment was completed at Rs. 35,49,250/-. The Assessing Officer also initiated penalty proceedings under section 270A of the Act.
Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). During the appellate proceedings, it was submitted that the fixed deposits were not made as an independent investment but were created solely for the purpose of furnishing a bank guarantee to SRA, which was a mandatory requirement for execution of the redevelopment project. It was contended that the interest earned on such deposits had a direct and inextricable nexus with the project and, therefore, was rightly capitalized to work-in-progress in accordance with the consistent accounting practice followed by the assessee. The assessee further submitted that though the SRA had cancelled the Letter of Intent, the same was challenged before the Hon’ble Bombay High Court and the matter was sub judice. It was contended that the Hon’ble High Court had granted status quo and, therefore, the project continued to subsist in law. On this basis, it was argued that the nexus between the fixed Shreenath Realtors deposits and the project continued to exist and the interest income could not be treated as income from other sources. Reliance was placed on various judicial precedents including CIT vs. Bokaro Steel Ltd. (236 ITR 315), CIT vs. Karnal Cooperative Sugar Mills Ltd. (243 ITR 2), and CIT vs. Indian Oil Panipat Power Consortium Ltd. (315 ITR 255), to contend that interest earned on funds intrinsically linked to a project is required to be capitalized. The assessee also relied upon Accounting Standard AS-16 to support capitalization of such income.
6. The learned CIT(A) recorded that though the project may have continued in a legal sense due to pendency of writ proceedings, there was no actual business activity carried on during the relevant year. It was observed that no construction or development activity was undertaken and the project remained dormant. The learned CIT(A) further held that the nexus between the fixed deposits and any ongoing business activity had ceased in view of cancellation of the project and release of bank guarantee. It was observed that the interest income was earned on idle funds and did not have any direct nexus with active business operations during the year. Relying upon the decision of the Hon’ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (227 ITR 172), the learned CIT(A) held that interest earned on surplus funds in the absence of business activity is taxable under the head “Income from Other Sources”. The judicial precedents relied upon by the assessee were Shreenath Realtors distinguished on facts. The learned CIT(A) also rejected the contention of the assessee based on the principle of consistency, observing that the facts in the year under consideration were materially different from earlier years. The reliance on Accounting Standard AS-16 was also not accepted, holding that accounting treatment is not determinative of taxability under the Act. Accordingly, the addition of Rs. 37,58,095/- made by the Assessing Officer was confirmed and the appeal of the assessee was dismissed.
Being aggrieved, the assessee is in appeal before us and has raised the following grounds:
1. The Learned CIT(A) erred in confirming the action of the Assessing Officer in treating the interest income of Rs. 37,58,095/- earned on fixed deposits as “Income from Other Sources” under Section 56, instead of permitting its capitalization to the Work-in-Progress (WIP) of the real estate project.
The Learned CIT(A) failed to appreciate that the fixed deposits were created solely to furnish the Bank Guarantee to the SRA, as a mandatory project requirement, and therefore the interest income thereon had a direct and inseparable nexus with the business activity of the appellant.
3. The Learned CIT(A) erred in holding that the interest income was an independent income from investments. This income arose directly from a business obligation and was intrinsically linked to the project activity.
The Learned CIT(A) erred in holding that there was no ongoing business activity merely because physical construction had ceased, ignoring the fact that the project continued to exist in law, owing to the status quo order of the Hon‟ble Bombay High Court, and thus the nexus between the FDs and the project remained legally and commercially intact.
5. The Learned CIT(A) failed to consider that as per Accounting Standard (AS)-16 on Borrowing Costs, interest and similar income earned on funds directly attributable to a qualifying asset under Shreenath Realtors construction or development must be capitalized to the cost of the asset.
The Learned ITO has erred in invoking and applying the provisions of Section 115BBE of the Income-tax Act, 1961, for taxing the addition of Rs. 37,58,095/-. The said amount represents interest income duly recorded and disclosed in the regular books of account, and the dispute is limited only to the question of its treatment— whether it should be capitalised to inventory or offered to tax as income. Since the addition does not emanate from any unexplained cash credit, investment, expenditure, or other deemed income contemplated under Sections 68 to 69D, the application of Section 115BBE is misconceived, excessive, and legally unsustainable.
7. Under the circumstances the Learned CIT(A) has not given reasonable opportunity to present the case.
The order is bad in law and against the principles of natural law of equity and justice needs to be struck down.
The appellant craves leave to add, to amend, alter/delete and/or modify the above grounds of appeal on or before the final hearing.
8. The learned Authorised Representative (AR) reiterated the submissions made before the lower authorities. It was submitted that the assessee is engaged in the business of development of real estate projects and had been allotted a Slum Rehabilitation (SRA) project at Nirmal Nagar, Sion-Koliwada, Mumbai, vide Letter of Intent dated 15.09.2009. The said project, however, got delayed due to technical reasons and the SRA authorities directed cancellation of the project vide communication dated 01.12.2015. The assessee, being aggrieved, challenged the cancellation by filing a writ petition before the Hon’ble Bombay High Court. It was further submitted that the Hon’ble High Court had granted interim relief by way of maintaining status quo, and therefore, the cancellation of the project had not attained finality. In view of the pendency of the writ proceedings, the project continued to subsist in the eyes of law during the year under consideration and was Shreenath Realtors required to be treated as an ongoing project for accounting and tax purposes. The learned Authorised Representative submitted that one of the pre-conditions imposed by the SRA authorities was furnishing of a bank guarantee, for which the assessee had to maintain fixed deposits with the bank. The interest earned on such fixed deposits amounting to Rs. 37,58,095/- was directly linked to the project and was accordingly capitalized to work-in- progress. It was emphasized that the Assessing Officer has not doubted the genuineness of the arrangement or the nexus of the fixed deposits with the bank guarantee requirement. It was further contended that the Assessing Officer proceeded on an erroneous assumption that the project stood terminated, relying inter alia on the alleged refund of certain project-related fees. However, the action of the SRA had itself been challenged before the Hon’ble Bombay High Court and had not attained finality. Therefore, the Assessing Officer was not justified in pre-empting the outcome of judicial proceedings and treating the project as non-existent. The learned AR also submitted that the communication relied upon by the Assessing Officer regarding refund of the bank guarantee was dated 03.07.2017, which falls in the subsequent assessment year i.e. A.Y. 2018–19. It was contended that even if such communication is to be considered, the tax implications thereof could arise only in the subsequent year and not in the year under consideration. In view of the above, it was submitted that the project was very much in existence during the relevant year, the fixed deposits were integrally connected with the project, and the interest earned Shreenath Realtors thereon was rightly capitalized to work-in-progress. It was thus contended that the addition made by the Assessing Officer and confirmed by the learned CIT(A) is unsustainable both on facts and in law.
9. The learned AR further assailed the findings of the learned CIT(A) on the ground that the judicial precedents relied upon therein (page No. 6) were incorrectly applied to the facts of the present case. The learned AR pointed out that the learned CIT(A) has placed reliance on a decision stated as CIT vs. Autopins (India) Ltd. (200 ITR 396) (Delhi). However, it was pointed out that the judgment reported at 200 ITR 396 is in fact a decision of the Hon’ble Madras High Court in the case of CIT vs. Trustees, T. Stanes & Co. Ltd., Staff Pension Fund, and not a decision in the case of Autopins (India) Ltd..It was further contended that the reliance placed by the learned CIT(A) on the decision of the Hon’ble Bombay High Court in CIT vs. Paramount Premises Pvt. Ltd. (190 ITR 259) is also misplaced.
The learned Departmental Representative, on the other hand, strongly relied upon the order of the learned CIT(A) and inviting our attention to para 6.6 and 6.7 of the impugned order, submitted that the learned CIT(A) has rightly applied the ratio laid down by the Hon’ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (227 ITR 172).
We have carefully considered the rival submissions, perused the orders of the lower authorities and examined the judicial precedents relied upon by both the parties. At the outset, it is an Shreenath Realtors undisputed factual position that the fixed deposits were not made as an independent investment of surplus funds but were created as a pre-condition for furnishing bank guarantee in connection with the SRA project . It is further evident that the cancellation of the project was under challenge before the Hon’ble Bombay High Court and had not attained finality during the year under consideration.
At this juncture, it is also pertinent to note that the bank guarantee furnished by the assessee had not been cancelled during the year under consideration. The reliance placed by the Assessing Officer on the communication dated 03.07.2017 for release/refund of the bank guarantee pertains to the subsequent previous year relevant to A.Y. 2018–19. Therefore, during the relevant year, the bank guarantee continued to subsist and the corresponding fixed deposits remained locked-in for business purposes. This factual position clearly establishes that the funds could not be regarded as surplus or idle during the year under consideration and continued to have a direct nexus with the project.
The Assessing Officer and the learned CIT(A) have primarily relied upon the judgment of the Hon’ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (227 ITR 172). In this regard, it is relevant to note the following observations of the Hon’ble Supreme Court:
Shreenath Realtors “If a company, even before it commences business, invests the surplus fund in its hand… the interest earned… will be chargeable under section 56.” (para 12) 14. Further, the Hon’ble Court held:
“If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature… the interest earned by the company… is its income and is clearly taxable…” (para 14) 15. A careful reading of the above clearly shows that the ratio of Tuticorin Alkali Chemicals applies to a situation where surplus funds are independently deployed to earn income. However, the Hon’ble Supreme Court in CIT vs. Bokaro Steel Ltd.(236 ITR 315) has carved out a clear distinction. The relevant findings are as under:
The activities of the assessee… were directly connected with or were incidental to the work of construction… The receipts… were intrinsically connected with the construction… and had gone to reduce the cost of construction.
(para 5) 16. Further, it was held:
“If the assessee received any amounts which were inextricably linked with the process of setting up its plant… such receipts would go to reduce the cost of its assets.” (para 7) 17. The Hon’ble Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. ITO (315 ITR 255) has elaborated the distinction between Tuticorin Alkali Chemicals and Bokaro Steel Ltd. in the following terms:
The test… is whether the funds are „surplus‟… If funds are surplus and invested, interest is taxable… On the other hand, if income is Shreenath Realtors earned on funds which are „inextricably linked‟ to the setting up of the plant, such income is required to be capitalized.
18. Further, it was observed:
“Since the funds… were primarily infused for a specific purpose… the interest earned… could not have been classified as „income from other sources‟.” (para 5.2) 19. In the context of bank guarantees, the Hon’ble Karnataka High Court in CIT vs. Chinna Nachimuthu Constructions (297 ITR 70) has held:
The investment… in fixed deposits… was only to secure a bank guarantee… therefore, it cannot be treated as income from other sources and interest… has to be treated as business income.
(para 4) 20. Further, the Hon’ble Bombay High Court in CIT vs. Paramount Premises Pvt. Ltd. (190 ITR 259) has recorded a finding of fact as under:
“The Tribunal has given a finding… that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity.” (para 2) 21. The above binding precedents clearly lay down that the determinative test is the existence of an inextricable nexus between the income and the business or project activity. Applying the aforesaid judicial principles to the facts of the present case, we find: i. Firstly, the fixed deposits were created not out of surplus funds but as a mandatory requirement for furnishing bank guarantee; Shreenath Realtors ii. Secondly, the bank guarantee continued to remain in force during the year under consideration and was not cancelled, thereby establishing that the funds were not free or idle; iii. Thirdly, the project had not attained finality of termination and continued to subsist in law during the relevant year; and iv. Fourthly, the interest income arose directly from funds which were integrally connected with the project.
Thus, the case of the assessee falls squarely within the ratio of Bokaro Steel Ltd., Indian Oil Panipat Power Consortium Ltd., Chinna Nachimuthu Constructions and Paramount Premises Pvt. Ltd., and is clearly distinguishable from Tuticorin Alkali Chemicals.
We also find that the learned CIT(A) has misapplied the decision in Paramount Premises Pvt. Ltd., which in fact supports the case of the assessee. Further, reliance placed on Tuticorin Alkali Chemicals without appreciating the distinction drawn in subsequent judicial pronouncements, and without considering the correct factual position that the bank guarantee continued during the year, renders the conclusion unsustainable.
In view of the above discussion, we hold that the interest income of Rs. 37,58,095/- is inextricably linked with the project and is required to be capitalized to work-in-progress. The addition made by the Assessing Officer and sustained by the learned CIT(A) is hereby deleted. Accordingly, the ground of appeal of the assessee is allowed.
Order pronounced in the open court on 01.04.2026.