2015 (10) TMI 2016 - AT - Income Tax

Expenditure set off against interest income - whether the receipt of interest on borrowed funds put in FDRs with the bank was capital receipt or revenue receipt? - Held that - In the instant case, the assessee has raised loans and borrowed funds from different persons to set up shopping malls, multiplexes and associated activities related thereto. In between construction period, funds were parked with the bank in fixed deposits and/or in mutual funds. The assessee earned on fixed deposits and earned gains in respect of investment in mutual funds. In addition to interest, the assessee has sold scrap which was the alleged result of the construction raised. The Assessing Officer while framing the assessment has taxed interest from FDRs, sale of wastage and mutual funds as income from other sources. It has not been brought on record that the surplus funds were put in FDRs on account of commercial expediency. Since the funds were not required at the relevant point of time in construction activities, the same were parked with bank to earn interest. Therefore, the interest earned on surplus funds parked with bank and in mutual funds are not inextricably linked with the construction of shopping malls, multiplex and other associate activities, etc. Therefore, the aforesaid interest earned on mutual funds by the assessee cannot be capitalized and have been rightly treated by the Revenue as income from other sources. We accordingly set aside the order of the ld. CIT(A) and restore that of the Assessing Officer. - Decided in favour of revenue. Sale of wastages - revenue v/s capital receipt - Held that - It is not clear from the orders of the lower authorities whether sale of wastage was at all generated during the construction activities or connected or inextricably linked with the construction of shopping mall and multiplexes. If it is sale of waste materials generated during the course of construction activities, it would reduce the cost of project; otherwise it would also be revenue receipt. With these directions, we restore the matter to the file of the Assessing Officer to verify the nature of sale of wastage material. We accordingly set aside the order of the ld. CIT(A) in this regard and restore the matter to the Assessing Officer to examine the nature of sale of waste material in terms indicated above and treat it accordingly. - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Treatment of interest income earned on borrowed funds during the construction period.
2. Nature of sale of wastage materials generated during the construction activities.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income Earned on Borrowed Funds During the Construction Period:
The primary issue revolves around whether the interest income earned on borrowed funds, which were temporarily parked in Fixed Deposit Receipts (FDRs) during the construction period, should be treated as a capital receipt or revenue receipt. The Revenue relied on the Supreme Court judgment in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, where it was held that interest income earned from surplus funds during the pre-commencement period is taxable as income from other sources. The assessee, however, argued that the borrowed funds were not surplus but temporarily parked due to delays in the project, and thus the interest earned should reduce the borrowing cost and project cost.

The CIT(A) sided with the assessee, distinguishing the facts from the Tuticorin Alkali case and relying on the Supreme Court judgments in CIT vs. Bokaro Steels Ltd. and CIT vs. Karnal Cooperating Sugar Mills Ltd., which held that interest earned on borrowed funds used for construction purposes should be treated as a capital receipt and reduce the cost of the project. The Tribunal, however, found that the assessee did not provide documentary evidence to support the claim that the funds were parked in FDRs under the bank's pressure. Consequently, the Tribunal concluded that the interest earned on these funds should be treated as income from other sources, aligning with the Tuticorin Alkali Chemicals and Fertilizers Ltd. case.

2. Nature of Sale of Wastage Materials Generated During the Construction Activities:
The second issue pertains to whether the income from the sale of wastage materials generated during the construction activities should be treated as a capital receipt or revenue receipt. The CIT(A) did not provide a clear finding on this matter. The Tribunal directed the Assessing Officer to verify whether the sale of wastage materials was generated during the construction activities. If it was, the income should reduce the cost of the project; otherwise, it should be treated as a revenue receipt.

Conclusion:
The Tribunal concluded that the interest income earned on borrowed funds parked in FDRs should be treated as income from other sources, as the assessee failed to provide evidence that the funds were parked due to commercial expediency. The matter of the sale of wastage materials was remanded back to the Assessing Officer to verify the nature of the sale and treat it accordingly. The appeal of the Revenue was partly allowed for statistical purposes.