2015 (5) TMI 1226 - AT - Income Tax

Taxability of interest under the head Income from other sources - Commissioner of Income Tax (Appeals) justification in holding that the interest accured / received was the Income of the assessee appellant - HELD THAT - We find that during this year assessee has borrowed certain funds as mentioned in the submissions before AO from PFC and ADB. Assessee had earlier taken the money from Delhi Jal Board on which no interest was required to be paid. It was held in the earlier year in assessee s own case that interest on such investment of these funds would be taxable. In view of the decision of Hon ble Supreme Court in case of Tuticorin Alkali Chemicals And Fertilizers Ltd. Vs. CIT 1997 (7) TMI 4 - SUPREME COURT . However the interest earned on temporary investment made out of the borrowed funds can not be taxed because these funds have been specifically borrowed for the purpose of project but project was delayed and therefore funds were parked in temporary investment in the form of FDR. However the details of these funds are not available on record therefore we set aside the order of Ld. CIT(A) and remit the matter back to the file of AO with a direction to examine bifurcation of funds borrowed by the assessee and funds owned by the assessee. Interest earned on account of funds borrowed should not be subjected to tax and only interest on balance surplus funds should be subjected to tax. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of interest income under "Income from other sources" versus "Income from business or profession."
2. Whether the interest accrued/received constitutes the income of the assessee.
3. Justification of the addition of Rs. 28,42,77,854.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income:
The primary issue is whether the interest earned by the assessee on temporary investments should be taxed under "Income from other sources" or "Income from business or profession." The assessee argued that since it is in the pre-operation stage and has not commenced commercial production, the interest earned on temporary bank deposits should be set off against capital expenditure. The assessee cited the Supreme Court judgment in the case of Bokaro Steel Limited, where interest earned on funds received for a specific purpose and kept temporarily in short-term deposits was classified as a capital receipt. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] relied on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT, which held that interest earned on surplus funds is taxable as "Income from other sources."

2. Interest Accrued/Received as Income:
The CIT(A) examined whether the interest earned on temporary investments of borrowed funds should be considered a revenue receipt chargeable under "Income from other sources" or a capital receipt that can be set off against pre-operative expenses. The CIT(A) concluded that the interest receipts were not inextricably linked to setting up the projects, as the deposits were not made as a mandatory business requirement but were instead surplus funds invested in the form of deposits with various banks. The CIT(A) distinguished the case from Indian Oil Panipat Power Consortium Ltd., where the share capital was introduced, and the deposits were a mandatory requirement for commencing business. The CIT(A) held that the interest earned in this case was not linked to the proposed business activity of the assessee and should be taxable as "Income from other sources."

3. Addition of Rs. 28,42,77,854:
The AO examined the submissions and held that the decisions relied upon by the assessee were distinguishable. The AO maintained that the interest on investment was taxable as income from other sources. On appeal, the CIT(A) upheld this addition, stating that the deposits made were not utilized as margin money or for any mandatory business requirement but were surplus funds. The CIT(A) held that the interest earned was not of a capital nature but revenue receipts taxable as income from other sources.

Separate Judgments Delivered:
The Tribunal considered the rival submissions and found that during the year, the assessee had borrowed funds from PFC and ADB, which were temporarily invested in FDRs due to project delays. The Tribunal cited the decision in M/s Beas Valley Power Corporation Ltd. Vs. The ACIT, where it was held that interest earned on temporary investments of borrowed funds should not be taxed. The Tribunal set aside the CIT(A)'s order and remitted the matter back to the AO to examine the bifurcation of funds borrowed by the assessee and funds owned by the assessee. The Tribunal directed that interest earned on borrowed funds should not be subjected to tax, and only interest on surplus funds should be taxed.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the order was pronounced in the Open Court on 06/05/2015.