2021 (2) TMI 1328 - AT - Income Tax

Correct head of income - Interest on fixed deposits - taxable under the head Other sources as the appellant did not commence business activity - HELD THAT - We find no substance in the assessee s foregoing grievance. Case records indicate hat the assessee had to commence its commercial operations for the project(s) in issue from December 31st, 2013 relevant to AY.2014-15 whereas we are in AYs.2012-13 2013-14 only. The clinching fact as emerges therefore is that the assessee has sought the assessment of its interest income as business income without having commenced its corresponding actual business activity at all in these two assessment years. We therefore find no reason to interfere with detailed reasoning extracted from the CIT(A) s order in the preceding paragraphs. We thus decline assessee s solitary grievance. Computation on netting basis - Assessee another plea that both the lower authorities ought to have adopted netting method by following the decision of ACG Associated Capsules Pvt. Ltd 2012 (2) TMI 101 - SUPREME COURT than assessing the entire interest income u/s.57 of the Act - HELD THAT - The fact remains that this issue has neither been examined in the course of assessment nor in the CIT(A) s order. We therefore draw support from their lordships above decision and direct the Assessing Officer to finalise necessary computation on netting basis. No other ground has been pressed before us.

Summary

Issues Involved:
1. Assessment of interest income under the head "income from other sources".
2. Commencement of business activity and its impact on tax treatment.
3. Allowability of expenditure incurred during the course of business.
4. Treatment of preliminary expenses.
5. Adoption of netting method for interest income assessment.

Detailed Analysis:

1. Assessment of Interest Income Under "Income from Other Sources":
The primary issue raised by the assessee was whether the interest income derived from fixed deposits, made as a pre-requisite to obtain loans from IDBI Bank Ltd., should be assessed under the head "income from other sources" or as "business income". The assessee argued that the interest income was related to the business and should be assessed as "business income". However, the CIT(A) and the Assessing Officer (AO) treated the interest income as "income from other sources" based on precedents such as Tuticorin Alkali Chemicals and Fertilisers Ltd., Coromandel Cements Ltd., and Autokast Ltd., where the Supreme Court held that interest earned on short-term deposits before the commencement of business is assessable under "income from other sources". The Tribunal upheld this treatment, noting that the assessee had not commenced its business operations in the relevant assessment years.

2. Commencement of Business Activity:
The Tribunal observed that the assessee had not commenced its commercial operations for the project(s) in issue until December 31, 2013, relevant to AY 2014-15. Since the assessment years in question were AY 2012-13 and AY 2013-14, the Tribunal found that the assessee had sought to assess its interest income as "business income" without having commenced its corresponding actual business activity. Therefore, the Tribunal upheld the CIT(A)'s finding that the business had not commenced during the years under consideration.

3. Allowability of Expenditure Incurred During the Course of Business:
The assessee contended that the expenditure incurred during the course of business should be allowed as a deduction. However, since the business had not commenced, the Tribunal found no basis to allow such deductions. The Tribunal upheld the CIT(A)'s decision that the expenses were preliminary and not allowable as business expenses.

4. Treatment of Preliminary Expenses:
The Tribunal confirmed the CIT(A)'s observation that the amount of Rs. 18,83,457/- (AY 2012-13) and Rs. 10,32,360/- (AY 2013-14) should be treated as preliminary expenses. These were not considered deductible as business expenses since the business had not commenced.

5. Adoption of Netting Method for Interest Income Assessment:
The assessee argued that the netting method should be adopted, following the decision in ACG Associated Capsules Pvt. Ltd. Vs. CIT, where the Supreme Court allowed netting of interest income against interest expenditure. The Tribunal noted that this issue had not been examined during the assessment or in the CIT(A)'s order. Therefore, the Tribunal directed the AO to finalize the necessary computation on a netting basis, in line with the Supreme Court's decision.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to assess the interest income under "income from other sources" and confirmed that the business had not commenced in the relevant assessment years. The Tribunal also directed the AO to adopt the netting method for interest income assessment as per the Supreme Court's directive. The appeals were partly allowed for statistical purposes.