Interest income on fixed deposits - urgent

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

19 November 2013 Dear All,

We had given Fixed deposits to excise department in lieu of duty payment on capital goods for project construction under provisional mega power status as per the Entry no. 338 of notification 12/2012 of Central Excise Dt. 17th Mar 2012. We had accrued the interest as income in our books of accounts? Please suggest the taxability of the said income and its correct accounting treatment???

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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19 November 2013 The income is taxable under the head income from other sources and the same should be credited to P&L A/c.
.

Querist : Anonymous

Querist : Anonymous (Querist)

20 November 2013 Dear Mr. Paras

Thank you for your reply. But our tax consultant is of the opinion that as the interest is earned in the process of capital asset construction we have to deduct the same from CWIP (Capital Work in Progress).

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 In the context of fixed deposits given to the Excise Department and the interest earned thereon during the construction of a capital asset, the treatment and taxability of the interest income can indeed be nuanced. Here's how you should approach it:

### **1. Taxability of Interest Income**

**Interest Earned on Fixed Deposits:**

- **Nature of Income**: The interest earned on fixed deposits given to the Excise Department is generally considered as income from other sources. This is irrespective of the fact that the deposits were made for the purpose of project construction.

**Accounting and Tax Implications:**

- **Taxable Income**: The interest income should be included in your taxable income under the head "Income from Other Sources" in your Income Tax Return. This means it will be subject to tax as per the applicable slab rates.

### **2. Accounting Treatment**

**Deducting Interest from CWIP:**

- **Capital Work in Progress (CWIP)**: According to accounting principles, particularly under the guidelines provided by the Accounting Standards and tax rules, interest earned on funds specifically earmarked for a capital project (such as the deposit for excise purposes) should be treated in relation to the cost of the asset being constructed.

**Guidance from Standards and Rules:**

- **Accounting Standards**: According to the Indian Accounting Standards (Ind AS) and the Generally Accepted Accounting Principles (GAAP), interest earned on temporary investments (such as fixed deposits) made out of funds meant for project construction can be deducted from the cost of the asset. This is done to ensure that the cost of the asset reflects the actual expenditure incurred.

- **Income Tax Act**: The Income Tax Act also aligns with this approach. The interest earned on such deposits should be adjusted against the cost of the asset under construction (CWIP), rather than being shown as a separate income item.

### **3. Recommended Approach**

1. **Accounting for Interest Income**:
- **Deduct from CWIP**: As per standard accounting practices, since the interest is earned on funds used for construction and is directly related to the project, it should be deducted from the CWIP. This approach aligns the cost of the asset with the actual expenditure.

2. **Tax Reporting**:
- **Report as Income**: Despite adjusting the interest income against CWIP for accounting purposes, it should still be reported as income from other sources in your tax return. This ensures compliance with the Income Tax Act.

### **Example Accounting Entries**

**When Interest Earned**:
- **Bank Account Debit**: [For the interest received]
- **Interest Income Credit**: [To record the interest earned]

**Adjustment Against CWIP**:
- **CWIP Debit**: [To increase the CWIP account]
- **Interest Income Credit**: [To reduce the income from interest]

### **Summary**

- **Interest Income**: Taxable under "Income from Other Sources".
- **Accounting Treatment**: Deduct from CWIP to reflect the actual cost of the asset.
- **Tax Reporting**: Report interest income in the tax return, but adjust it in the books to align with the cost of the asset.

**Consultation with Tax and Accounting Professionals**: Given the specifics of your situation and the potential implications, it's advisable to consult with your tax consultant or an accounting professional to ensure compliance with the applicable standards and tax regulations.