2017 (5) TMI 903 - AT - Income Tax

Charging of tax on the interest received from the temporary fixed deposits from the escrow account out of the barrowed funds committed for project implementation - whether the assessee business has been set up or commenced? - Held that - The preoperative expenditure was to be capitalized to the assets and Assessee was eligible for depreciation on the value of assets. Therefore in the given facts of the case, we hold that Assessee has only setup the business but has not commenced the business, therefore, the claim of revenue expenditure is not allowable as the provisions of Sec. 28 of the IT Act does not apply. The Hon ble jurisdictional High Court in the case of CIT Vs. Rasi Cement Ltd. 1998 (4) TMI 132 - ANDHRA PRADESH High Court has answered similar questions involved in favour of the Revenue as held that such interest has to be separately treated as income from other sources and cannot be taken as part of the capital structure following the decision of the Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., Vs. CIT 1997 (7) TMI 4 - SUPREME Court . It was categorically held that interest earned on surplus funds deposited in banks during installation of company, prior to commencement of business, has to be brought to tax as income from other sources u/s. 57. Respectfully following the jurisdictional High Court decision also, the contentions of assessee that this amount has to be adjusted towards capital account cannot be accepted. - Decided against assessee.

Issues Involved:
1. Whether the interest earned is a capital receipt.
2. Whether the interest income can be set off against interest paid.
3. Whether the interest income was taxable as income from business.
4. Whether the nature/character of interest can be different from the related interest expenses.
5. Whether business loss carried forward can be set off against the interest income.

Detailed Analysis:

1. Whether the interest earned is a capital receipt:
The Assessee argued that the interest earned from temporary fixed deposits of borrowed funds should be treated as a capital receipt, citing the Supreme Court's decision in CIT Vs Bokaro Steel Ltd., which held that receipts linked with the setting up of a business are capital in nature and should reduce the cost of construction/project. However, the Tribunal referred to the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which established that interest earned on borrowed funds invested in short-term deposits is taxable as income from other sources, not as a capital receipt.

2. Whether the interest income can be set off against interest paid:
The Assessee claimed that the interest income should be set off against the interest expenditure incurred on borrowed funds. The Tribunal rejected this argument, citing the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd., which stated that interest earned on borrowed funds is taxable as income from other sources and cannot be set off against interest payable on borrowed funds. The Tribunal emphasized that the Assessee's business had not commenced, and therefore, the interest expenditure could not be adjusted against the interest income.

3. Whether the interest income was taxable as income from business:
The Assessee contended that the interest income should be taxed under the head "profits and gains of business" since the funds were borrowed for setting up a power project. The Tribunal disagreed, referencing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on borrowed funds invested in short-term deposits before the commencement of business is taxable as income from other sources, not as business income.

4. Whether the nature/character of interest can be different from the related interest expenses:
The Tribunal addressed the Assessee's argument that the nature of interest income should be aligned with the related interest expenses. However, it upheld the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd., which clarified that interest earned on borrowed funds is distinct from the interest expenses and should be treated as income from other sources.

5. Whether business loss carried forward can be set off against the interest income:
The Assessee argued that the business loss should be allowed to be carried forward and set off against the interest income. The Tribunal rejected this claim, stating that since the Assessee had not commenced its business operations, the expenditure incurred could not be treated as revenue expenditure. The Tribunal referred to various judicial decisions, including the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that pre-operative expenses should be capitalized and not allowed as revenue expenditure.

Conclusion:
The Tribunal dismissed the Assessee's appeal, confirming the orders of the lower authorities. It held that the interest earned on temporary fixed deposits of borrowed funds is taxable as income from other sources and cannot be set off against the interest expenditure or treated as a capital receipt. The Tribunal also ruled that the business loss cannot be carried forward and set off against the interest income, as the Assessee had not commenced its business operations. The principles laid down by the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. were followed, and the Assessee's contentions were rejected on all grounds.

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