2017 (11) TMI 1815 - AT - Income Tax

Chargeability of interest income on deposits to tax - whether CIT-A was justified in confirming the addition made on account of interest income on deposits earned by the assessee? - HELD THAT - It is not in dispute that the business of setting up of a steel plant had not commenced during the year under appeal. It is not in dispute that the assessee had received share capital from its shareholders and also term loans from banks for the purpose of its business of setting up of a steel plant. The unutilized portion of the said funds were invested in short term deposits with banks and interest income derived thereon by the assessee. We are unable to sustain the view taken by the CIT-A by placing reliance on Tuticorin Alkali Chemicals 1997 (7) TMI 4 - SUPREME COURT . The interest income derived by the assessee in the sum of ₹ 3,50,47,844/-, being the amounts invested in deposits out of share capital, would be capital receipt and would go to reduce the project cost of steel plant as it is inextricably linked with the setting up of the power plant. Following the same judgement, we hold that the interest income derived in the sum of ₹ 18,88,559/- from deposits invested out of borrowed funds, would be liable to tax under the head income from other sources, which would be in line with the decision of the Hon ble Apex Court in the case of Tuticorin Alkali Chemicals. Deposits were invested with bank for obtaining Bank Guarantees in favour of Customs Department which is inextricably linked with the business of setting up of steel plant of the assessee. Hence the ratio laid down in the decisions in the case of CIT vs Bokaro Steel Ltd 1998 (12) TMI 4 - SUPREME COURT ; CIT vs Karnal Co-operative Sugar Mills Ltd 1999 (4) TMI 7 - SUPREME COURT ; and Bongaigaon Refinery Petrochemicals Ltd vs CIT 2001 (7) TMI 4 - SUPREME COURT would be squarely applicable to the instant case and hence the interest income derived thereon would only go to reduce the project cost of steel plant and hence had to be construed as capital receipt. Accordingly, the grounds raised in this regard by the assessee are allowed

Summary

Issues Involved:
1. Chargeability of interest income on deposits to tax.
2. Classification of interest income as "income from other sources" or "business income."
3. Deduction of expenses under Section 57 of the Income Tax Act.
4. Levy of interest under Section 234C of the Income Tax Act.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Analysis of the Judgment:

1. Chargeability of Interest Income on Deposits to Tax:
The primary issue in both appeals was whether the interest income on deposits earned by the assessee should be taxed. The assessee argued that the interest income should be set off against pre-operative expenses as it was linked to the setting up of a steel plant. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CITA] held that the interest income should be taxed as "income from other sources."

2. Classification of Interest Income:
The assessee contended that the interest income was incidental to its business activities and should be classified as "business income." The AO and CITA relied on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilisers Ltd. to classify the interest income as "income from other sources." However, the Tribunal referred to the Supreme Court's decisions in Bokaro Steel Ltd., Karnataka Power Corporation, and other cases to conclude that interest earned on funds inextricably linked to the setting up of a plant should be considered a capital receipt and set off against pre-operative expenses.

For the assessment year 2008-09, the Tribunal held that the interest income of ?3,50,47,844 earned from equity funds was a capital receipt and should reduce the project cost. However, the interest income of ?18,88,559 from term loan funds was taxable as "income from other sources."

For the assessment year 2009-10, the Tribunal applied the same rationale. The interest income of ?1,79,65,828 from equity funds and ?2,34,84,796 from bank guarantees linked to the business were considered capital receipts. The interest income of ?2,42,96,798 from term loan funds was taxable as "income from other sources."

3. Deduction of Expenses Under Section 57:
The assessee claimed a deduction of ?41,36,849 as per Section 57 of the Act against the interest income earned on fixed deposits sourced from term loans. The AO disallowed this claim, and the CITA upheld the decision. The Tribunal did not specifically address this issue in the final judgment, implying that the disallowance was upheld.

4. Levy of Interest Under Section 234C:
The assessee challenged the levy of interest under Section 234C of the Act. The Tribunal did not specifically address this issue, implying that the levy of interest was upheld.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings under Section 271(1)(c) for filing inaccurate particulars of income or concealing income. The Tribunal did not specifically address this issue, implying that the initiation of penalty proceedings was upheld.

Conclusion:
The Tribunal partly allowed the appeals for both assessment years. The interest income from equity funds and bank guarantees was considered a capital receipt to be set off against the project cost, while the interest income from term loan funds was taxable as "income from other sources." The other grounds raised by the assessee were not specifically addressed, implying that the decisions of the AO and CITA on those issues were upheld.