2016 (3) TMI 924 - AT - Income Tax

Interest accruing on FDRs treated as income from other sources - commencement of business - Held that - In the facts of the present case where the entire funds available with the assessee company is in respect of the business undertaking being set up by the assessee company previous year will start only after the setting up of the business undertaking and not before that and the interest income from the FD is not an independent source of income de horse the business undertaking because the earning of interest income is not the object of the assessee company and the funds were not arranged by the assessee company for earning interest income and therefore the previous year in the facts of the present case will start on setting up of the business and thereafter if the assessee is having any interest income then the same will be taxable under the head income from other sources and after the commencement of the business the income from operation will be taxable under the head income from business but it cannot be said that interest income is a separate and new source of income de horse the business undertaking and therefore the previous year in respect of interest income starts on the date of purchase of FD. In our considered opinion on the date of purchase of FD no new source of income has come into existence because in our considered opinion the source of income is business undertaking and therefore the requirement of starting of previous year in the facts of the present case is setting up of business which has not happened till 31/03/2011 in the present case and therefore any income from this source cannot be brought to tax before the setting up of business is completed resulting into start of the previous year. in the facts of the present case the previous year has not yet started in respect of the business undertaking of the assessee for generation of power and since the assessee is not having any other source of income de horse this business undertaking which was not set up interest income earned by the assessee till 31/03/2011 cannot be brought to tax till the assessment year 2011-12 because the business was not set up and therefore previous year has not commenced. We therefore delete the addition made by the Assessing Officer and confirmed by CIT(A) and hold that such interest income should be reduced from the cost of project instead of taxing it as an income from other sources. - Decided in favour of assessee

Issues Involved:
1. Determination of the nature of interest income earned on Fixed Deposit Receipts (FDRs) during the project implementation phase.
2. Determination of whether the business was "set up" and whether the "previous year" had commenced for the purpose of taxability.

Issue-wise Detailed Analysis:

1. Determination of the nature of interest income earned on Fixed Deposit Receipts (FDRs) during the project implementation phase:

The primary issue raised by the assessee was whether the interest income of Rs. 56,05,335 for the assessment year 2010-11 and Rs. 2,83,20,702 for the assessment year 2011-12, earned on FDRs, should be classified as "income from other sources" or as a capital receipt that offsets or reduces the cost of the power project under implementation. The assessee argued that the interest earned was inextricably linked with the implementation of the power project and thus should be considered a capital receipt, citing the rule in Bokaro Steel Ltd [1999] 236 ITR 315 (SC) and Indian Oil Panipat Power Consortium Ltd v. ITO 315 ITR 255 (Del).

The CIT(A) upheld the assessment of the interest income as "income from other sources," relying on the judgment in CIT vs. Indo Gulf Fertilizer and Chemicals Corporation Ltd. [2006] 280 ITR 621 (All), and other Supreme Court judgments such as Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC), CIT vs. Coromandal Cements Ltd. [1998] 234 ITR 412 (SC), and CIT vs. Autokast Ltd. [2001] 248 ITR 410.

2. Determination of whether the business was "set up" and whether the "previous year" had commenced for the purpose of taxability:

The assessee contended that the business had not been "set up" within the meaning of section 3 of the I.T. Act, 1961, and therefore, the "previous year" had not commenced, making the income non-taxable. The assessee relied on the judgment in Commissioner of Wealth-tax vs. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC), which defined "setting up" as the stage when the business is ready to commence operations.

The Tribunal examined whether the business was "set up" by considering the facts and the definition of "previous year" under sections 3 and 4 of the I.T. Act. It was noted that the assessee's business of power generation was not ready to commence operations as of 31/03/2011. The Tribunal referred to the judgments of Hon'ble Bombay High Court in Western India Vegetable Products Ltd. vs. CIT, 26 ITR 151, and Hon'ble Gujarat High Court in CIT vs. Sarabai Sons Pvt. Ltd., 90 ITR 318, which emphasized that the previous year begins from the date of setting up of the business.

The Tribunal concluded that the interest income earned on FDRs was not an independent source of income but was linked to the capital funds meant for the power project. Since the business was not "set up," the previous year had not commenced, and thus, the interest income could not be taxed as "income from other sources." Instead, this income should be reduced from the cost of the project.

Conclusion:

The Tribunal allowed the appeals, holding that the interest income earned by the assessee during the project implementation phase should be treated as a capital receipt and reduced from the cost of the project. The business was not "set up" by 31/03/2011, and therefore, the previous year had not commenced, making the interest income non-taxable under the head "income from other sources."

Order:

Both appeals of the assessee were allowed, and the additions made by the Assessing Officer and confirmed by CIT(A) were deleted. The interest income was directed to be reduced from the cost of the project.

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