2012 (9) TMI 728 - AT - Income Tax

Interest on FDRs made out of zero coupon convertible bonds - Business income OR income from other sources - Held that - If accompany 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. The company may keep the surplus funds in short term deposits in order to earn interest. Such interests will be chargeable under section 56. As the assessee made FDRs of the funds, therefore, making such FDRs was not at all related to the construction activity or any other capital installation, therefore, earning of interest on FDRs, before commencement of business, is income from other sources as decided in Commissioner Of Income-Tax Versus Modi Rubber Limited 1994 (3) TMI 70 - DELHI HIGH COURT - against assessee.

Summary

Issues Involved:
1. Classification of interest income earned from Fixed Deposit Receipts (FDRs) made out of zero coupon convertible bonds.
2. Applicability of judicial precedents and relevant case laws.
3. Treatment of interest income as "business income" vs. "income from other sources."

Detailed Analysis:

1. Classification of Interest Income Earned from FDRs:
The primary issue in this case is whether the interest income earned from FDRs, made out of zero coupon convertible bonds, should be classified as business income or income from other sources. The assessee argued that the interest income should be considered business income, relying on the decision from Hon'ble Madras High Court in the case of CIT vs. VGR Foundations (2008) 298 ITR 132 (Mad.). The Assessing Officer, however, treated this interest as income from other sources. The learned CIT(A) affirmed this view, referencing decisions in CIT vs. Modi Rubber Limited (208 ITR 370) and Mangal Cements Limited (217 ITR 369), which supported the classification of such income as income from other sources.

2. Applicability of Judicial Precedents and Relevant Case Laws:
Several judicial pronouncements were considered to determine the correct classification of the interest income. Key cases include:
- VGR Foundations (Madras High Court): The Tribunal and High Court held that interest on monies borrowed prior to the commencement of business could be allowed as deduction from interest under Section 57 of the Act while computing income from other sources.
- Madhya Pradesh State Industries Corporation Limited vs. CIT (69 ITR 824): It was held that deposit of share capital in a bank cannot be considered an act of money lending, and thus, the interest income was assessable as income from other sources under Section 56 of the Income Tax Act, 1961.
- GTN Textiles Limited vs. DCIT (2010) 326 ITR 352 (Ker): The Hon'ble Kerala High Court held that interest from share application money placed in deposit is income from other sources.
- Tuticorin Alkali Chemicals & Fertilizers Limited (227 ITR 172): The Supreme Court held that interest earned from investment of borrowed funds prior to the commencement of business is assessable as income from other sources, and no deduction or set-off is permissible against such interest.

3. Treatment of Interest Income as "Business Income" vs. "Income from Other Sources":
The Tribunal examined whether the interest income from FDRs should be treated as business income or income from other sources. The Tribunal noted that the interest earned from fixed deposits was not in the ordinary course of the assessee's business. The Tribunal emphasized that the deposit of money in the bank was not sufficient to show that it was made with a view to carrying out business in the sense of earning profit by investment. Therefore, the interest income earned by the assessee was not business income but assessable as income from other sources. This view was supported by the decision from the Hon'ble Kerala High Court in GTN Textiles Limited, where similar facts led to the classification of interest income as income from other sources.

The Tribunal also considered the decision in Karnal Cooperative Sugar Mills Limited (243 ITR 2), distinguishing it on facts, as the interest in that case was earned on money deposited to open a letter of credit for purchasing machinery, directly linked to the acquisition of assets for setting up the plant. This was not analogous to the present case, where the interest was earned from surplus funds deposited in the bank.

Finally, the Tribunal concluded that the interest of Rs. 31,39,70,137 earned on FDRs prior to the commencement of business from debenture loans amounting to Rs. 900 crores is clearly income from other sources and not business income. The Tribunal dismissed the appeal of the assessee, affirming the decision of the learned CIT(A).

Conclusion:
The Tribunal ruled that the interest income earned from FDRs made out of zero coupon convertible bonds is to be treated as income from other sources and not as business income. This decision was supported by various judicial precedents and the facts of the case, leading to the dismissal of the assessee's appeal.