2015 (11) TMI 628 - AT - Income Tax

Interest income earned by the assessee - whether is an income chargeable under the head Income from other sources ? - Held that - Interest income earned through short-term deposits by investing the borrowed capital as income not connected with the construction and business activity of the assessee. The very same issue has also been considered by the hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT 1997 (7) TMI 4 - SUPREME Court and held that the interest earned by the assessee before the commencement of business on short- term deposits with the bank s out of term loans secured from financial institutions is 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. In the present case, the assessee has failed to substantiate that the assessee has already commenced its business operations. Therefore we are of the opinion that the interest income earned by the assessee is an income chargeable under the head Income from other sources . - Decided against assessee.

Summary

Issues:
Assessment of interest income as revenue receipt under "Income from other sources" instead of capital receipt claim.

Analysis:
The appeal was against the order of the Commissioner of Income-tax (Appeals) regarding the assessment year 2000-01. The assessee, a joint venture company for software development infrastructure, claimed interest income as a capital receipt. The Assessing Officer assessed it as a revenue receipt under "Income from other sources" based on precedents like the Tuticorin Alkali Chemicals case. The Commissioner of Income-tax (Appeals) upheld this decision. The Tribunal directed a de novo assessment considering the Franco Tosi Ingegneria case and the Bokaro Steel Ltd. case. The Assessing Officer found the interest income not linked to business setup and treated it as revenue. The Tribunal noted the company's incorporation and project approval but found no evidence of business commencement. The Tribunal dismissed the appeal, following the Tuticorin Alkali Chemicals case, as the interest income was not connected to business operations.

The key point of contention was whether the interest income earned by the assessee was a revenue receipt under "Income from other sources" or a capital receipt linked to business setup. The Tribunal considered the company's incorporation, project approval, and fund sources but found no proof of business commencement. The Assessing Officer, following the Bokaro Steel Ltd. case, treated the interest income as revenue. The Tribunal, aligning with the Tuticorin Alkali Chemicals case, concluded that the interest income was not connected to business operations and upheld the revenue treatment. The Tribunal dismissed the appeal, emphasizing the lack of evidence regarding business commencement and the nature of the interest income.

In conclusion, the Tribunal upheld the revenue treatment of interest income under "Income from other sources" as it was not linked to business operations. Despite the company's incorporation and project approval, the absence of evidence of business commencement led to the dismissal of the appeal. The decision aligned with precedents like the Tuticorin Alkali Chemicals case, emphasizing the importance of establishing a connection between income and business activities for appropriate assessment.