2016 (7) TMI 1096 - AT - Income Tax

Assessment of interest received on compulsory FDR - income from other sources OR business activity - Held that - Interest earned by the assessee on FDRs has intrinsic and inseggregable nexus with the work undertaken and therefore the interest earned by the assessee is capital in nature and shall go towards adjustment against the project expenditure and the same cannot be assessed as income from other sources. SEE CIT vs. Bokaro Steel Ltd. (1998 (12) TMI 4 - SUPREME Court ) and CIT vs. Karnal Co-operative Sugar Mills Ltd. 1999 (4) TMI 7 - SUPREME Court and CIT vs. Jaypee DSC Ventures Ltd 2011 (3) TMI 309 - Delhi High Court - Decided in favour of assessee. Disallowance of loss which includes business expenditure - addition confirmed as no income was earned by the appellant during the relevant previous year - Held that - The routine expenses incurred by the assessee after setting of the business in our view are allowable as business expenditure. This issue is accordingly decided in favour of the assessee. See CIT Vs. Dhoomketu Builders and Development P. Ltd. 2013 (4) TMI 668 - DELHI HIGH COURT wherein held there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business would be permissible deductions/business loss. - Decided in favour of assessee

Summary

Issues involved:
1. Taxability of interest received on compulsory Fixed Deposit Receipt (FDR) as 'income from other sources'.
2. Disallowance of business expenditure when no income was earned during the year.

Issue 1: Taxability of interest on compulsory FDR:
The appellant, engaged in construction business, had deposited a performance security FDR with a bank. The interest earned on the FDR was reduced from the work in progress by the appellant. The Assessing Officer (AO) taxed the interest under 'Income from other Sources' despite the appellant's argument that it was linked to the project and should not be taxed. The CIT(A) upheld the AO's decision stating that the funds for FDR were not generated from business activities. The appellant cited various case laws, including the Supreme Court and Delhi High Court decisions, to support their claim. The Delhi High Court decision supported the appellant's argument that interest earned on FDRs with intrinsic nexus to the project should be treated as capital in nature and not taxed as income from other sources. The Tribunal decided in favor of the appellant, following the Supreme Court and Delhi High Court decisions.

Issue 2: Disallowance of business expenditure:
The AO disallowed business expenditure as no income was earned during the year. The CIT(A) upheld this decision, stating that expenses related to the incomplete project should have been capitalized. The appellant referred to a Delhi High Court decision distinguishing between setting up and commencement of business, allowing expenses after setting up but before commencement as deductions. The Tribunal, following the Delhi High Court's decision, allowed routine expenses incurred after setting up the business as business expenditure. The issue was decided in favor of the appellant.

In conclusion, the Appellate Tribunal ITAT Mumbai partially allowed both appeals, ruling in favor of the appellant on the taxability of interest earned on compulsory FDR and the allowability of business expenditure incurred after setting up the business. The judgment highlighted the significance of the nexus between income and business activities in determining taxability and deductible expenses.