2017 (5) TMI 1660 - AT - Income Tax

Taxability of interest earned on Fixed Deposits during pre-operative period when business has not commenced - correct head of income - HELD THAT - It is clear that assessee, even though has borrowed funds has not utilised them for the purpose of project and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicates that the funds are not utilised for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given. The issue of interest earned on FDs of surplus funds are considered by the Hon ble Supreme Court in a series of judgments. If the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. The interest on FDs have no connection with the project/construction activity, then the same is to be brought to tax under the head Other Sources . The order of the CIT(A) has clearly demarcated the distinguishing features of various judgments of Hon ble Supreme Court and has correctly came to the conclusion that interest on FDs is taxable during the pre-operative period under the head Other Sources . Respectfully following the jurisdictional High Court judgment as supported by the principles laid down by the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., 1997 (7) TMI 4 - SUPREME COURT , BONGAIGAON REFINERY AND PETROCHEMICALS LTD. 2001 (7) TMI 4 - SUPREME COURT and AUTOKAST LTD. 2000 (11) TMI 7 - SUPREME COURT appeal of assessee dismissed.

Summary

Issues: Taxability of interest earned on Fixed Deposits during pre-operative period when business has not commenced.

Analysis:
1. The appellant, an assessee involved in developing warehouses and godowns, capitalized all expenditures under 'preoperative expenses.' The Assessing Officer (AO) noted interest income earned on Fixed Deposits (FDs) and questioned its taxability under 'other sources.' The appellant argued the interest was set-off against borrowed interest and not taxable as business had not started. The AO disagreed, leading to the appeal.

2. The CIT(A) analyzed relevant judgments, including the Tuticorin Alkali case, Bokaro Steel Ltd. case, and subsequent decisions. The CIT(A) concluded that interest earned during the pre-operative period is taxable under 'other sources,' following Supreme Court precedents. The CIT(A) emphasized that interest income from FDs cannot be adjusted against project costs.

3. The appellant contended that borrowed funds were not surplus, seeking to set-off interest against borrowed funds during construction. The Departmental Representative supported the AO and CIT(A) orders based on Supreme Court principles.

4. The ITAT considered the appellant's arguments, case facts, and legal precedents. The tribunal noted that funds were not utilized for the project but kept in FDs, indicating no connection to the business. Referring to Tuticorin Alkali and subsequent judgments, the ITAT upheld the taxability of interest on FDs under 'other sources,' rejecting the appellant's contentions.

5. Citing the jurisdictional High Court decision in Raasi Cement Ltd., the ITAT affirmed the tax treatment of interest on surplus funds as 'Income from Other Sources.' Following Supreme Court precedents and the High Court decision, the ITAT upheld the CIT(A) order, dismissing the appeal.

6. Ultimately, the ITAT pronounced the appeal dismissed, confirming the taxability of interest earned on FDs during the pre-operative period under 'other sources.'

This detailed analysis highlights the legal journey and reasoning behind the decision on the taxability of interest earned on Fixed Deposits before commencing business activities.