2011 (2) TMI 1520 - HC - Income Tax

Taxability under head income from other sources - interest income generated from the amount (amount contributed as share capital money, deposited into bank and pledge against bank guarantee issued FDR) - Tribunal arrived at a finding that the interest earned on the aforesaid amount was not inextricably linked for the setting up of the project - HELD THAT - On these facts being established, the Tribunal applied the ratio of the judgment of this Court in the case of INDIAN OIL PANIPAT POWER CONSORTIUM LIMITED, NEW DELHI VERSUS INCOME TAX OFFICER 2009 (2) TMI 32 - DELHI HIGH COURT as well as the COMMISSIONER OF INCOME TAX VERSUS PANEM COAL MINES LTD. 2009 (9) TMI 1016 - DELHI HIGH COURT . In the aforesaid two judgments of this Court after discussing the legal principle in detail, the Court has held that if the interest earned on the fund which are to be utilized for purchase of capital asset/ setting up of the business and that is inextricably linked with the setting up of the business, said interest will not be treated as income under the head income from other sources . While coming to this conclusion the Court has specifically referred to the judgment of Supreme Court in the case of COMMISSIONER OF INCOME-TAX VERSUS BOKARO STEEL LIMITED 1998 (12) TMI 4 - SUPREME COURT where it was held that it is well-settled that an income received by the assessee can be taxed under the head income from other sources only if it does not fall under any other head of income as provided in Section 14 of the Act. The head income from other sources is a residuary head of income. Thus, no question of law arises - appeal dismissed.

Summary

Issues:
1. Taxability of interest income generated from funds utilized for setting up a business.

Analysis:
The judgment involves a case where the Assessing Officer treated the interest income generated from funds utilized for setting up a business as income under the head "income from other sources." The CIT (A) upheld this decision, but the ITAT reversed it, holding that the interest income should be treated as a capital receipt not exigible to tax under the head "income from other sources." The ITAT found that the interest earned was not inextricably linked to the setting up of the project, as the business was still in the process of being established during the relevant assessment years.

The Tribunal applied the legal principles established in previous judgments, particularly referencing the judgments of the High Court in the cases of Indian Oil Panipat Power Consortium Ltd. and Commissioner of Income Tax Vs. Panem Coal Mines Ltd. These judgments emphasized that interest earned on funds intended for the purchase of capital assets or setting up a business, and inextricably linked with those activities, should not be treated as income under the head "income from other sources."

Furthermore, the Tribunal referred to the Supreme Court judgment in the case of Bokaro Steel Ltd., which laid down the test that income connected with business activities should be taxed under the appropriate head depending on its nature, either revenue or capital receipt. The Tribunal concluded that in this case, the interest income earned from funds utilized for setting up the business did not fall under the head "income from other sources" as it was directly linked to the business establishment process.

Ultimately, the Court dismissed the appeals, stating that no question of law arose in this matter, thereby upholding the ITAT's decision to treat the interest income as a capital receipt and not taxable under the head "income from other sources."