2018 (5) TMI 2059 - AT - Income Tax

Correct head of income - Interest amount as assessable as income from other sources - Interest income earned by depositing the share capital money against the interest expenses - capital gain or income from other sources - HELD THAT - As decided in own case 2017 (12) TMI 192 - ITAT HYDERABAD the interest income earned by assessee by depositing the share capital in Fixed Deposits under constraint are eligible to treat the income as capital in nature and allowed to set off against the pre-commencement expenses during the year. Accordingly, grounds raised by the assessee are allowed.

Summary

Issues involved:
Appeal against CIT (A) order for A.Y 2014-15 - Taxability of interest income as income from other sources.

Analysis:
1. Background: The case involves an appeal by the assessee against the CIT (A) order for the assessment year 2014-15. The assessee, a company awaiting government clearances to start a power generation plant, received share capital and invested it in fixed deposits, setting off the interest income against preoperative expenses, resulting in a loss for the year.

2. Reopening of Assessment: The AO reopened the assessment for the previous year, asserting that the interest income from fixed deposits, sourced from share capital, should be taxed as income from other sources, disallowing its set off against preoperative expenses. This decision led to the scrutiny of the return for the A.Y 2014-15.

3. Judicial Precedent: The assessee cited a Tribunal decision in its own case for A.Ys 2012-13 and 2013-14, where it was held that interest income can be set off against pre-commencement expenses. The Tribunal considered the purpose of the share capital, the project's status, and the interest income earned under constraints.

4. Legal Interpretation: The Tribunal analyzed various judicial pronouncements, including Supreme Court decisions in similar cases. It highlighted that surplus funds invested in fixed deposits are taxable as income from other sources, while funds inextricably linked to project setup should be capitalized. The Tribunal referred to specific cases to support the treatment of interest income as capital receipt.

5. Decision and Rationale: After considering the arguments and precedents, the Tribunal allowed the appeal, directing the AO to permit the set off of interest income against pre-operative expenses. The decision was based on the nature of the funds, the purpose of the share capital, and the link between the interest income and the project's implementation.

6. Conclusion: The Tribunal's decision favored the assessee, allowing the set off of interest income against pre-operative expenses, in line with the legal interpretation and judicial precedents cited during the proceedings.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved, the legal arguments presented, and the final decision rendered by the Tribunal.