2017 (5) TMI 540 - HC - Income Tax

Interest earned on Fixed Deposit receipts - Revision u/s 263 - revenue or capital receipt - process of setting up of industry - Held that - It is not in dispute that the assessee had income of interest through FDRs and while setting off that the Assessing Officer as well as the ITAT did not examine the aspect as to under which provision the assessee claimed deduction or set off of his income from other sources against interest payable on the borrowed fund. The reason given is that the amount pertaining to FDR was not surplus amount but part of amount that was kept to obtain letter of credit for purchase of machinery. While accepting the fact that the FDR was for obtaining letter of credit to purchase machinery but so far as interest earned thereon is concerned that is nothing but income through other sources as such the Commissioner of Income Tax rightly treated the same as income taxable. So far as the second question is concerned as to whether the Commissioner of Income Tax was justified in invoking powers under Section 263 of the Act of 1961 by holding that the enquiry conducted by the Assessing Officer before the assessment order was neither proper nor adequate we would like to state that the order passed by the Assessing Officer nowhere reflects about any enquiry said to be made. It simply refers the explanation given by the assessee and nothing beyond that. We are inclined to accept this appeal. The order passed by the Income Tax Appellate Tribunal set aside and Commissioner of Income Tax s invoking powers under Section 263 stands restored.

Summary

Issues:
1. Interpretation of interest earned on Fixed Deposit receipts used as borrowing margin money for setting up an industry - capital receipt or revenue income?
2. Adequacy of enquiry conducted by Assessing Officer before passing assessment order under Section 263 of the Income Tax Act, 1961.

Analysis:
1. The first issue pertains to the nature of interest earned on Fixed Deposit Receipts (FDRs) used as borrowing margin money for setting up an industry. The Commissioner of Income Tax held that the interest earned on FDRs was taxable income and could not be set off as margin money. The Income Tax Appellate Tribunal, however, considered the FDR amount as part of the project cost and deemed the interest accrued as business expenditure, setting it off accordingly. Referring to a Supreme Court case, it was established that interest earned on borrowed funds for setting up a factory is taxable as income from other sources. The Tribunal's decision was overturned, and the interest was deemed taxable income as per the Commissioner's assessment.

2. The second issue revolves around the adequacy of the enquiry conducted by the Assessing Officer before passing the assessment order under Section 263 of the Income Tax Act. The Commissioner found the Assessing Officer's order erroneous and prejudicial to revenue due to lack of proper enquiry. The Tribunal, however, set aside the Commissioner's order under Section 263. The High Court noted that the Assessing Officer's order lacked details of any conducted enquiry, merely mentioning the assessee's explanation. Consequently, the High Court upheld the Commissioner's decision, emphasizing the necessity for a proper enquiry before assessment.

Additional Judgment:
A separate judgment, D.B. Income Tax Appeal No.46/2006, was discussed concerning the assessment year 1996-97. The Tribunal's order was challenged following the setting aside of the Commissioner's order under Section 263. The High Court admitted the appeal, considering the substantial question of law regarding the Tribunal's decision to set aside the assessment order linked to the revised Section 263 order. As the revisional order was restored, the High Court directed the restoration of the assessment order as well, requiring the Tribunal to re-adjudicate the matter on merits.

In conclusion, the High Court upheld the Commissioner's assessment regarding the taxation of interest earned on FDRs and emphasized the importance of conducting proper enquiries before passing assessment orders under Section 263. The judgments clarified the taxability of interest income and the procedural requirements for accurate assessments under the Income Tax Act, 1961.