2018 (11) TMI 1660 - AT - Income Tax

Taxability of interest income from short term fixed deposits - interest earned on short term fixed deposits is necessarily should be reduced from work in progress OR taxable under the head income from other sources - HELD THAT - The law relied by the Ld. Representative of the assessee has decided this controversy by holding this fact that the interest income is in connection with the business exigency therefore the same is liable to be treated as business income. in the case of Infrastructure Development Company of Rajasthan Ltd. Vs. DCIT 2016 (9) TMI 957 - ITAT JAIPUR has held that the interest income upon the deposit by the assessee for the utilization of fund for the project is liable to be treated as business income. In the instant case the assessee company has been incorporated for setting up of infrastructure facilities being construction of toll road between Hazaribag and Ranchi which is under construction. The assessee earned the interest income upon the borrowed funds of 46, 03, 457/- which was deducted from the borrowing cost to arrive at the figure of capital work in progress of 1, 86, 25, 83, 284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Needless to say that the on account of the time difference the funds may lies with the bank resultantly earning the interest income in dispute. These funds were deposit in the bank for a short period for the purpose of utilizing the same in the project. Eventually raising the interest is clearly on account of business exigency. Taking into account all the facts and circumstances we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee. - the appeal filed by the assessee is hereby ordered to be allowed for statistical purpose

Issues Involved:
1. Classification of interest income as "Income from Other Sources" versus "Business Income."
2. Deduction of interest expenditure against taxable income.
3. Allowability of revenue expenditure.
4. Capitalization of revenue expenditure.
5. Liability to pay interest under Section 234D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Issue No. 1: Classification of Interest Income
The core issue was whether the interest income of ?46,03,457/- should be classified as "Income from Other Sources" or "Business Income." The assessee argued that the interest income from deposits should be treated as business income, citing various legal precedents. The Tribunal examined the facts and noted that the assessee, a special purpose vehicle (SPV), was engaged in a project with the National Highways Authority of India and had not commenced its business operations. The funds borrowed for the project were kept in fixed deposits to meet future interest obligations, which was a business exigency. The Tribunal referenced several judgments, including those from the Delhi High Court and Supreme Court, which supported the treatment of such interest income as business income when it is inextricably linked to the business activity. Consequently, the Tribunal concluded that the interest income should be treated as business income.

Issue No. 2: Deduction of Interest Expenditure
The assessee claimed a deduction of ?1,74,11,160/- against the interest income of ?46,03,457/- under the head "Income from Other Sources." However, this issue was not pressed by the assessee during the proceedings. Therefore, the Tribunal decided this issue in favor of the revenue, against the assessee.

Issue Nos. 3 & 4: Allowability and Capitalization of Revenue Expenditure
The assessee claimed revenue expenditure of ?7,58,233/- and alternatively sought to capitalize this amount and add it to the capital work in progress. The Assessing Officer (AO) had declined the claim. The Tribunal noted that the assessee did not press for the allowability of the revenue expenditure (Issue No. 3) but pressed for the capitalization (Issue No. 4). Since the CIT(A) had not adjudicated this issue, the Tribunal set aside the CIT(A)’s findings and remanded the matter back to the AO for fresh consideration, directing the AO to provide an opportunity for the assessee to be heard.

Issue No. 5: Liability to Pay Interest under Section 234D
The assessee contested the liability to pay interest under Section 234D of the Income Tax Act, 1961. However, this issue was not elaborated upon in the judgment.

Conclusion:
The appeal was allowed for statistical purposes. The Tribunal ordered the interest income to be treated as business income and remanded the issue of capitalization of revenue expenditure back to the AO for fresh adjudication. The other issues were either not pressed or decided in favor of the revenue. The order was pronounced in the open court on 28.11.2018.

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