2013 (6) TMI 129 - HC - Income Tax

Interest accrued on equity funds deployed with the Bank - zero coupon money - nexus of funds invested in FDR - income from other sources OR capital receipt - Held that - Interest earned by the assessee before commencement of business on short term deposits with banks, even out of term loans secured from financial institutions, is an income chargeable under the head income from other sources and would not go to reduce the interest payable by the assessee which would be capitalised after the commencement of commercial production. See Tuticorin Alkali Chemicals & Fertilizers Ltd Versus CIT 1997 (7) TMI 4 - SUPREME Court & M.P. State Industries Corporation (1968 (4) TMI 2 - MADHYA PRADESH High Court) wherein held that the interest earned by investing the surplus share money in bank deposits, such interest is taxable as income from other sources and not as business income. Also see Shree Krishna Polyster Ltd (2004 (10) TMI 42 - BOMBAY High Court). Not a fit case for filing an SLP before the Apex Court. The prayer made by the appellant is rejected.

Summary

Issues involved:
1. Taxation of interest earned on FDRs made from zero coupon convertible bonds.
2. Classification of interest earned as income from business or income from other sources.

Analysis:

Issue 1: Taxation of interest earned on FDRs from zero coupon convertible bonds
The appellant contested the addition of Rs.31,39,70,137 to their total income by the ITAT and CIT, arguing that the interest accrued on equity funds invested in FDRs should be considered as a capital receipt set off against pre-operative expenses. The appellant received Rs.900 Crores in zero coupon convertible debentures, of which Rs.500 Crores were invested in short-term deposits with various banks, leading to the interest accrual. The Assessing Officer treated this interest as income from other sources, not as a capital accretion. The appellant's appeal to the CIT(A) and ITAT was unsuccessful, prompting the current appeal.

Issue 2: Classification of interest earned as income from business or income from other sources
The main contention was whether the interest earned on the FDRs should be taxed as income from business or income from other sources. The appellant argued that the interest should be considered as business income to reduce construction costs and capital investment. The appellant cited a Madras High Court judgment to support their position. However, the revenue contended that the interest should be taxed as income from other sources, citing Supreme Court and High Court judgments that supported this view. The courts referred to various precedents, including Tuticorin Alkali Chemicals & Fertilizers Ltd., to establish that interest earned on short-term deposits is taxable as income from other sources and not as business income.

In conclusion, the High Court dismissed the appeal, stating that the interest earned on the FDRs constituted income from other sources based on established legal precedents. The court found no substantial questions of law warranting further consideration and rejected the appellant's request to file an SLP before the Apex Court. The judgment emphasized the consistent legal position that such interest income is taxable under the head "income from other sources."