2017 (7) TMI 1206 - HC - Income Tax

Capitalization of Interest income on FDR s - thereby reducing the cost of fixed assets - ITAT observed that interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head Capital work in progress and the same cannot be brought to tax under the head income from other sources . Held that - In our considered opinion the amount which was lying with the assessee was required to be invested in a project. The said amount cannot be kept for a long time ideally in view of the fact that principal amount which was kept for business purpose has been kept for investment purpose ideally. - Order of ITAT confirmed - Decided against the Revenue.

Summary

Issues:
Challenge to Tribunal's order on income earned on FDR being treated as business income.

Analysis:
The appellant challenged the Tribunal's order regarding the treatment of income earned on Fixed Deposit Receipts (FDR) as business income. The substantial question of law framed was whether the Tribunal was justified in deleting the addition made by the assessing officer on account of income from other sources. The Tribunal considered the issue of interest received prior to the commencement of commercial operations of mega road projects. The Revenue argued for taxing it as income from other sources, while the assessee contended it should be set off against pre-operative expenditure. The Tribunal referred to previous judgments and held that if funds borrowed for setting up a plant are surplus and invested in fixed deposits, the interest earned will be taxable as income from other sources. However, if the income is linked to setting up the plant, it should be capitalized against pre-operative expenses. The Tribunal found the interest earned by the assessee on borrowed funds for mega road projects to be inextricably linked to the projects and not taxable as income from other sources.

The assessing officer, in the order, mentioned that even if the income is considered from other sources, it would increase the gross block of the road, which could be set off against the loss from the current year's business. The AO did not accept the assessee's argument that the interest earned from FDRs should not be considered business receipts. The AO noted that the assessee had spare funds to invest in FDRs and that the commencement of business alone does not change the treatment of income. The appellant contended that the investment was a surplus amount, but the Tribunal disagreed, stating that the amount with the assessee was required to be invested in the project and could not be kept for a long time as surplus.

In conclusion, the High Court dismissed the appeal, agreeing with the Tribunal's decision. The Court found no substantial question of law arising from the matter. The judgment upheld the treatment of interest earned on FDRs as a capital receipt linked to the mega road projects, to be set off against pre-operative expenditure, rather than being taxed as income from other sources.