2017 (9) TMI 737 - HC - Income Tax

Interest income - income earned on FDRs made out of the unutilised fund borrowed for the setting up of the business - whether should be reduced from the cost of the project instead of taxing it as an income from other sources - Held that - Interest on Fixed Deposit Receipt has no immediate nexus with the business of Assessee company. Business is yet to commence. So long as Assessee had no business income, the interest earned can not be treated as business income. Thus in our view, it has to be treated as income from other sources . We answer question no.1, holding that Tribunal was not justified in holding that interest income earned on Fixed Deposit Receipt should be allowed to be reduced from the cost of project instead of tax as an income from other sources. We also answer question no. 2 against Assessee company and in favour of Revenue, holding that Tribunal was not justified by not following the law laid down in Tuticorin Alkali Chemical and Fertilizers Ltd. Vs. ITC (1997 (7) TMI 4 - SUPREME Court) and Commissioner of Income Tax Vs. Indo Gulf Fertilizer and Chemical Corporation Limited (2005 (8) TMI 45 - ALLAHABAD High Court ). Similarly, question no. 3 is also answered by holding that Tribunal was not justified in taking a view so as not to allow Section 56 to be attracted in the case in hand.

Issues Involved:
1. Whether the interest income earned on FDRs made out of unutilized funds borrowed for setting up the business should be reduced from the cost of the project or taxed as income from other sources.
2. Whether the Tribunal was justified in dismissing the department's appeal contrary to the law laid down by the Supreme Court in Tuticorin Alkali Chemical and Fertilizers Ltd. Vs. Commissioner of Income Tax and Commissioner of Income Tax Vs. Indo Gulf Fertilizers and Chemical Corporation Ltd.
3. Whether the Tribunal was justified in holding that income by way of interest on securities is taxable even if it does not arise from the profits and gains of the business or profession.

Detailed Analysis:

Issue 1: Interest Income on FDRs
The core issue was whether the interest income earned on Fixed Deposit Receipts (FDRs) from unutilized borrowed funds should be considered as a capital receipt, reducing the cost of the project, or as income from other sources. The Assessee company, which was in the process of setting up a Thermal Power Project, argued that such interest income should be treated as a capital receipt. However, the Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as "income from other sources" under Section 56 of the Income Tax Act, 1961. The Tribunal initially sided with the Assessee, but the High Court found that the interest on FDRs had no immediate nexus with the business of the Assessee company, which had not yet commenced its business. Therefore, the interest earned should be treated as "income from other sources."

Issue 2: Tribunal's Dismissal of Department's Appeal
The Tribunal dismissed the department's appeal by not following the law laid down by the Supreme Court in Tuticorin Alkali Chemical and Fertilizers Ltd. Vs. Commissioner of Income Tax and Commissioner of Income Tax Vs. Indo Gulf Fertilizers and Chemical Corporation Ltd. The High Court emphasized that the interest earned by the Assessee on short-term deposits should be assessed separately under the head "Other sources" as per the Supreme Court's ruling in Tuticorin Alkali Chemical and Fertilizers Ltd. The High Court reiterated that the source of income and the head of income are distinct, and interest earned on deposits before the commencement of business should be treated as "income from other sources."

Issue 3: Applicability of Section 56
The Tribunal's view that income by way of interest on securities is taxable even if it does not arise from the profits and gains of the business or profession was challenged. The High Court referred to several precedents, including Commissioner of Income Tax Vs. Govinda Choudhury & Sons and Commissioner of Income Tax Vs. Rajasthan Land Development Corporation, which held that interest on fixed deposits before the commencement of business is "income from other sources." The Court concluded that interest income should be assessed under Section 56 of the Income Tax Act, 1961, as it does not arise from the business operations of the Assessee.

Conclusion:
The High Court held that the Tribunal was not justified in its findings and that the interest income earned on FDRs should be taxed as "income from other sources." The Court restored the judgment of the A.O. and CIT(A), confirming this treatment of the interest income. The appeals were allowed, and the Tribunal's judgment was set aside, with no order as to costs.

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