2015 (3) TMI 1345 - AT - Income Tax

Income from other sources - interest earned on Fixed Deposit prior to communication of project - classification of income - interest earned by the assessee from the nationalised banks as concerned with setting up or commencing of the business - HELD THAT - The assessee deposited money in the bank is itself not sufficient to show that the deposit was made with a view to carrying out the business in the sense of earning profit by investment. There was neither setting up nor commencement of business during the year under consideration,that non commencement of the project is continuing since 1993,that the money raised in form of OFCE was not raised for any construction of project or purchase of plant and machinery or for obtaining any license or letter of credit etc. but was only done with a specific and limited purpose to reduce resultant tariff of the project,that had nothing to do with the setting up or commencing of the business, that it was a pure and simple case of accruing of interest income from deposit-we are of the opinion that that the assessee earned the interest from the bank deposits and earning of interest was plainly not in the ordinary course of its business and that the interest earned by the assessee was rightly assessed under the head income from other sources. We find that the FAA has clearly and logically distinguished the cases relied upon by the assessee. On the other hand,cases quoted by him, while upholding the order of the AO, fortify our view. He has also analysed the audited accounts and various agreements entered into by the assessee.In our opinion, his order does not suffer from any legal or factual infirmity. Considering the peculiar facts and circumstances of the case for the year under appeal, we decide effective ground of appeal against the assessee.

Summary

Issues Involved:
1. Treatment of interest earned on Fixed Deposit prior to the commencement of the project as income from other sources.
2. Rejection of the revised return filed by the assessee beyond the permissible date.
3. Determination of whether interest income should be set off against the interest expenses incurred for the project to reduce the Capital Work in Progress (CWIP).

Detailed Analysis:

1. Treatment of Interest Earned on Fixed Deposit as Income from Other Sources:

The assessee, engaged in manufacturing and power and energy, filed its return declaring total income at Rs. 7.98 Crores. The AO treated the interest earned on Fixed Deposits (FDs) prior to the commencement of the project as income from other sources. The AO relied on precedents, stating that the interest income from FDs was not linked to the business operations but was a separate income source. The assessee argued that the interest income should be adjusted against the CWIP, citing various Supreme Court decisions. The FAA, after examining all agreements and the project status, upheld the AO's view, stating that the interest earned was from surplus funds and not directly linked to the project. The FAA distinguished the assessee's case from cited precedents, emphasizing that the project had not commenced for over 20 years, and the interest income was rightly assessed under the head "income from other sources."

2. Rejection of the Revised Return:

The assessee filed a revised return during the assessment proceedings, which the AO rejected as it was filed beyond the permissible date under section 139(5) of the Act. The AO held that the revised return could not be considered for assessment purposes. The FAA supported this view, noting that the revised return was filed after the statutory deadline and thus could not be entertained. The FAA also pointed out that the assessee had consistently offered interest income as income from other sources in previous years and had not demonstrated any mistake or wrong statement in the original return that would warrant a revision.

3. Set-Off of Interest Income Against Interest Expenses to Reduce CWIP:

The core dispute was whether the interest income should be allowed to set off against the interest expenses incurred for the project to reduce the CWIP. The assessee contended that the interest earned on FDs should be adjusted against the project cost, citing various judicial precedents. However, the FAA and the Tribunal found that the project had not commenced, and the interest income was not directly linked to any business activity or project construction. The Tribunal referred to several judicial decisions, including the Supreme Court's ruling in Tuticorin Alkali Chemicals and Fertilizers Ltd., which held that interest income earned from surplus funds is taxable under the head "income from other sources" and cannot be adjusted against project expenses. The Tribunal concluded that the interest income was rightly assessed as income from other sources, given the prolonged non-commencement of the project and the nature of the funds.

Conclusion:

The Tribunal upheld the FAA's decision, rejecting the revised return and confirming the treatment of interest income as income from other sources. The appeal filed by the assessee was disallowed, with the Tribunal emphasizing that the interest earned from FDs was not linked to any business activity or project construction and was rightly assessed under section 56 of the Act. The order was pronounced in the open court on 18th March 2015.