2015 (7) TMI 1370 - AT - Income Tax

Correct head of income - treating the interest on FDRs as income from other sources - assessee has taken up a project of NHAI for broadening of section of National Highway 22 but during the year under consideration the company has not commenced any commercial activity as the project was under construction - HELD THAT - The issue is squarely covered against the assessee by the judgment of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Vs. CIT 1997 (7) TMI 4 - SUPREME COURT as well as by the order of the I.T.A.T. Chandigarh Bench in the case of M/s. HP Corporation Ltd. 2014 (6) TMI 1050 - ITAT CHANDIGARH - We therefore do not find any error in the order of the learned CIT (Appeals) in holding that the interest income earned by the assessee company is taxable as income from other sources . The appeal of the assessee has no merit and the same is accordingly dismissed.

Summary

Issues Involved:
1. Classification of interest income on FDRs as "income from other sources".
2. Applicability of Supreme Court judgments in similar cases.
3. Treatment of interest income in pre-operative stage.

Detailed Analysis:

1. Classification of Interest Income on FDRs as "Income from Other Sources":
The primary issue in this case revolves around whether the interest income of Rs. 1,76,06,556/- earned on Fixed Deposit Receipts (FDRs) should be classified as "income from other sources". The assessee argued that the interest earned was inextricably linked to the road construction project and should be treated as a capital receipt, reducing the project cost. However, the Assessing Officer (AO) and the learned CIT (Appeals) disagreed, treating the interest as income from other sources. The AO relied on the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on short-term investments of borrowed funds during the construction period should be assessed as income from other sources.

2. Applicability of Supreme Court Judgments in Similar Cases:
The assessee cited the Supreme Court judgment in CIT Vs. Bokaro Steel Ltd. and the Delhi High Court judgment in Indian Oil Panipat Consortium Ltd. to support its claim. In Bokaro Steel Ltd., the Supreme Court held that certain receipts directly connected with the construction of a plant were capital receipts. Similarly, in Indian Oil Panipat Consortium Ltd., the Delhi High Court held that interest earned on funds infused for specific business purposes was a capital receipt. However, the learned CIT (Appeals) distinguished these cases from the present one, noting that in Bokaro Steel Ltd., the interest was earned on advances made to contractors, which were directly linked to the construction activity. In contrast, in the present case, the interest was earned on surplus funds not immediately required for the project, making it taxable as income from other sources.

3. Treatment of Interest Income in Pre-Operative Stage:
The learned CIT (Appeals) and the Tribunal emphasized that the interest income earned by the assessee on surplus funds during the pre-operative stage should be treated as income from other sources. The Tribunal cited the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on short-term deposits of borrowed funds should be taxed as income from other sources, even if the business had not commenced. The Tribunal also referenced its own decision in the case of M/s. HP Power Corporation Ltd., where a similar claim was dismissed, reaffirming that interest income during the pre-operative stage is taxable as income from other sources.

Conclusion:
The Tribunal upheld the learned CIT (Appeals)'s decision, dismissing the appeal of the assessee. It concluded that the interest income earned by the assessee on surplus funds during the pre-operative stage was correctly classified as income from other sources. The Tribunal found no merit in the assessee's reliance on the judgments in Bokaro Steel Ltd. and Indian Oil Panipat Consortium Ltd., as the facts of those cases were distinguishable. The Tribunal affirmed that the Supreme Court's judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. was applicable, and the interest income was taxable as income from other sources. Thus, the appeal was dismissed, and the order of the learned CIT (Appeals) was upheld.