2018 (11) TMI 1643 - AT - Income Tax

Interest Income receipts - Characterization of income - Income from Other Sources or business income - business had not started - HELD THAT - CIT(A) applying the Apex Court decision in Tuticorin Chemicals 1997 (7) TMI 4 - SUPREME COURT has held that the assessee had untrammelled freedom to utilize the funds the way it wanted. The fact that it chose to park its surplus funds during the commencement period in short term deposits to earn interest income was a voluntary decision and not a forced one. If a company has not commenced business there cannot be any question of assessment of its profits and gains of business. That does not mean that until and unless the company commences its business its income from any other source will not be taxed. If the company even before it commences business keeps the surplus funds in shortterm deposits in order to earn interest as in this case such interest will be chargeable under section 56 of the Act. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under section 56. Thus the assessee cannot claim adjustment of the impugned expenditures against interest assessable under section 56. There are specific provisions in the Income-tax Act for setting off loss from one source against income from another source under the same head of income (section 70) as well as setting off loss from one head against income from another (section 71). In the facts of this case the company cannot claim any relief under either of these two sections since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting year. In such a situation the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction nor can it be adjusted against any other income under any other head etc. The assessee could not challenge any of these findings and the corresponding application of law. Apex court very clearly confirmed that the interest earned by an assessee on the investment of share capital in call deposits before the commencement of its production could be assessed separately under the head Other sources - Decided against assessee.

Summary

Issues Involved:
1. Taxability of interest income earned prior to the setup of business.
2. Classification of interest income under the head "Income from Other Sources."
3. Deductibility of expenses incurred prior to the commencement of business against interest income.

Detailed Analysis:

1. Taxability of Interest Income Earned Prior to the Setup of Business:
The primary issue involves whether the interest income earned by the assessee, a company in the process of setting up its business, should be taxed. The assessee earned Rs. 3,20,36,214/- as interest income from short-term deposits before commencing commercial production. The Assessing Officer (AO) taxed this interest income under "Income from Other Sources," citing the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs CIT, which held that interest earned by a company before the commencement of business is taxable as income from other sources.

2. Classification of Interest Income Under the Head "Income from Other Sources":
The assessee argued that the interest income from short-term deployment of equity funds should be considered a capital receipt, not subject to tax. However, the AO and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this argument. The CIT(A) emphasized that the assessee had the freedom to utilize the funds as it wished and chose to park the surplus funds in short-term deposits voluntarily. The CIT(A) upheld the AO's decision, reinforcing that interest income earned before business commencement is taxable under section 56 of the Income Tax Act, as per the Supreme Court's ruling in Tuticorin Alkali Chemicals.

3. Deductibility of Expenses Incurred Prior to the Commencement of Business Against Interest Income:
The assessee also contended that expenses amounting to Rs. 2,55,75,842/- incurred before the business setup should be set off against the interest income. The CIT(A) rejected this claim, stating that the expenses related to the setting up of business and manufacturing operations in the pre-commencement phase are not deductible from interest income under section 57 of the Income Tax Act. The CIT(A) cited the Supreme Court's decision, which clarified that expenditures incurred for setting up a business cannot be adjusted against income from other sources if the business has not commenced.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the interest income earned by the assessee before the commencement of business is taxable under "Income from Other Sources" as per section 56 of the Income Tax Act. The Tribunal also confirmed that the expenses incurred for setting up the business cannot be deducted from this interest income. The assessee's appeal was dismissed in its entirety, reaffirming the principles laid down by the Supreme Court in Tuticorin Alkali Chemicals and subsequent decisions.

Final Judgment:
The assessee's appeal is dismissed. The order pronounced in the open court on 27th November 2018 at Chennai.