2014 (6) TMI 1050 - AT - Income Tax

Correct head of income - treatment of interest on FDR s during the construction period - capital receipt or income from other sources - HELD THAT - We find that the facts of the present case are similar to the facts before the Hon 'ble Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT 1997 (7) TMI 4 - SUPREME COURT and applying the ratio laid down by the Hon 'ble Apex Court we hold that the interest earned by the assessee by parking its funds in short term deposits with the bank is assessable as income from other sources. We find no merit in the reliance placed upon the decision in Indian Oil Panipal Consortium Ltd. 2009 (2) TMI 32 - DELHI HIGH COURT as the facts of the said case were at variance. We also find no merit in the plea of the assessee that the interest earned by the assessee is to be infused as share capital and/or to be returned to the Principals who had had advanced the loans to the assessee as the assessee has failed to bring on record any evidence to establish its claim. Merely because the money in future would be utilized for capital expenditure does not make the receipts as capital receipts in the hands of the assessee. - Decided against assessee.

Issues Involved:
1. Treatment of interest earned on Fixed Deposit Receipts (FDRs) during the construction period.
2. Whether the interest earned on FDRs should be treated as "Income from Other Sources" or as a capital receipt.
3. Applicability of the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT.

Detailed Analysis:

1. Treatment of Interest Earned on FDRs During the Construction Period:
The primary issue in both appeals was the treatment of interest earned on FDRs during the construction period. The assessee, a government company set up as a joint venture, had not commenced commercial production during the relevant years. The assessee argued that the interest earned should be considered a capital receipt, set off against pre-operative expenses. The Assessing Officer (AO) disagreed, treating the interest as "Income from Other Sources" based on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. The AO noted that the business had not commenced, and the funds were not invested in setting up the plant, thus the interest income could not be linked to the business setup.

2. Whether the Interest Earned on FDRs Should Be Treated as "Income from Other Sources" or as a Capital Receipt:
The assessee contended that the funds were earmarked for specific projects and that the interest earned was inextricably linked to the capital expenditure. However, the CIT (Appeals) observed that no activity towards setting up the power plants had commenced during the relevant years, and the interest income was thus not linked to any business operations. The CIT (Appeals) upheld the AO's decision, noting that the interest income was of a revenue nature and should be taxed as "Income from Other Sources."

3. Applicability of the Supreme Court's Decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT:
The CIT (Appeals) and the Tribunal both relied heavily on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on surplus funds before the commencement of business should be treated as "Income from Other Sources." The Tribunal distinguished this case from other cited cases like Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd., noting that in those cases, the interest income was inextricably linked to the business operations, unlike in the present case where the funds were merely parked in short-term deposits.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, confirming that the interest earned on FDRs during the construction period should be treated as "Income from Other Sources." The Tribunal found no merit in the assessee's argument that the interest income should be considered a capital receipt or additional equity. The Tribunal emphasized that the utilization of the income does not determine its nature, and since the business had not commenced, the interest income was taxable under "Income from Other Sources" as per the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd.

Order Pronounced:
Both appeals filed by the assessee were dismissed, and the orders of the CIT (Appeals) were upheld. The judgment was pronounced in the open court on June 30, 2014.

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