2014 (3) TMI 299 - HC - Income Tax

Taxability of interest income from investment in Portfolio Management Scheme under which the banks gave an assured earning guarantee. - Held that - The facts of the present case are not on all fours with those in Bokaro (1998 (12) TMI 4 - SUPREME Court). - Herein the investment of the funds has nothing to do and was not inextricably linked with the construction of the project. It was an investment under the portfolio management scheme operated by banks under which an assured return was guaranteed by the banks. It was a conscious act of investment of funds by the assessee and if such investment results in income, the same must be brought to tax under the residual head, even if the company has not commenced its business, on the basis of Tuticorin (1997 (7) TMI 4 - SUPREME Court). Tribunal placed undue emphasis on the source of the funds instead of focussing its attention to the utilisation of the fund whether they were invested in activities which are inextricably linked with the construction of the project. In fact, the assessee in the present case had invested the funds under the PMSV operated by the banks for an assured return. The interest income cannot, therefore, be permitted to be adjusted against the capital work in progress or the pre-operative expenses. - Decided in favor of revenue.

Summary

Issues:
1. Whether the interest income invested through the Portfolio Management Scheme by the assessee is taxable as 'income from other sources'?

Analysis:
The case involved a dispute regarding the taxability of interest income of Rs.90,37,029 invested by the assessee through a Portfolio Management Scheme. The assessing officer initially held that the interest was separately assessable under the head "income from other sources" and rejected the claim for adjustment against pre-operative expenses related to a project. The Tribunal, however, in its impugned order, held that the interest could not be separately taxed and should be adjusted against the project expenses based on the Supreme Court ruling in CIT vs. Bokaro Steel Ltd. The revenue appealed against this decision under Section 260A of the Income Tax Act, 1961.

The High Court analyzed the facts of the case, emphasizing that the source of funds, whether borrowed or provided by promoters, is irrelevant in determining taxability. The Court referred to the Tuticorin case, stating that income generated from fruitfully utilizing capital is taxable, regardless of its source. It differentiated the present case from Bokaro, where income was linked to the project under construction. In this case, the investment in the Portfolio Management Scheme was not linked to the project but was a conscious act to earn income. The Court criticized the Tribunal for focusing on the source of funds rather than the utilization, as emphasized in Tuticorin.

The Court concluded that the interest income should be taxed under the head "income from other sources" and not adjusted against project expenses. It held that the Tribunal erred in its interpretation and ruled in favor of the revenue, allowing the appeal. The judgment clarified the principles of taxability concerning income generated from investments and highlighted the importance of the utilization of funds in determining tax treatment, irrespective of the funding source.