2013 (1) TMI 929 - AT - Income Tax

Interest on Fixed Deposits - Netting of interest income on FD with interest expenses on borrowings for setting up of business u/s 57(iii) - Assessee had obtained large amount of secured loan, out of which it had invested an amount in FD in banks, from which it had earned interest. Since the assessee had not commenced business operation, the AO was of the view that the said amount of interest earned on that FDS in banks, is taxable as income under the head income from other sources. - HELD THAT - The interest income earned during the year by the assessee, from the FDs made out of borrowed funds was rightly taxed by the AO. Interest payable on borrowed funds has no connection with the receipt of interest. The interest payable on the loans out which the FDs were made is not allowable as deduction u/s 57(iii). Decision in the case of TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD VERSUS COMMISSIONER OF INCOME-TAX 1997 (7) TMI 4 - SUPREME COURT , relied upon. Decided against the assessee.

Issues Involved:
1. Taxability of interest earned on fixed deposits made from borrowed funds.
2. Classification of interest income as "Income from Other Sources" versus capital receipt.
3. Applicability of precedents and judicial decisions.

Detailed Analysis:

Taxability of Interest Earned on Fixed Deposits Made from Borrowed Funds:
The assessee, a company implementing a multi-product special economic zone, earned interest income of Rs. 6,09,35,544/- on fixed deposits made from borrowed funds amounting to Rs. 375 crores. The Assessing Officer (AO) taxed this interest income as "Income from Other Sources" under Section 143(1) of the Income Tax Act for the assessment year 2008-09, as the business operations had not commenced.

The assessee contended that the interest earned should be netted off against the interest paid on the borrowed funds (Rs. 37,24,56,856/-) and treated as preoperative expenses, citing decisions in CIT Vs. Bokaro Steel Ltd., Indian Oil Panipat Power Consortium Ltd. Vs. ITO, and others.

Classification of Interest Income as "Income from Other Sources" Versus Capital Receipt:
The AO and CIT(A) held the interest income as taxable under "Income from Other Sources." The assessee appealed, relying on Delhi High Court decisions in Indian Oil Panipat Power Consortium Ltd. and NTPC SAIL Company P Ltd v CIT, which held that interest earned on funds inextricably linked to project setup should be treated as a capital receipt and set off against preoperative expenses.

The Delhi High Court distinguished the Supreme Court's decision in Tuticorin Alkali Chemicals, where interest on surplus funds was taxed as "Income from Other Sources." The High Court emphasized the connection between borrowed funds and project setup, classifying such interest as a capital receipt.

Applicability of Precedents and Judicial Decisions:
The Tribunal examined precedents, including decisions from the Supreme Court in CIT v. Bokaro Steel, CIT vs. Karnataka Power Corporation, and Bongaigaon Refinery and Petro Chemical Co. Ltd. vs. CIT, which supported the assessee's stance. However, the Tribunal noted that in the assessee's case for the preceding year (AY 2007-08), it had upheld the AO's decision to tax the interest income as "Income from Other Sources," following the Supreme Court's ruling in Tuticorin Alkali Chemicals.

The Tribunal concluded that the interest income of Rs. 6,09,35,544/- was rightly taxed under "Income from Other Sources" and that the interest payable on borrowed funds was not deductible under Section 57(iii).

Conclusion:
The appeal was dismissed, affirming the AO's decision to tax the interest income as "Income from Other Sources" and denying the deduction of interest payable on borrowed funds. The Tribunal adhered to its previous ruling in the assessee's case for AY 2007-08 and distinguished the Delhi High Court's decisions based on the Supreme Court's precedent in Tuticorin Alkali Chemicals.

Pronounced in the open court on 18th January, 2013.

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