2019 (7) TMI 437 - HC - Income Tax

Interest earned on short term deposits - equity funds for purchase of assets, prior to commencement of business - capital receipt OR Income from Other Sources - HELD THAT - On a perusal of the Assessment Order, the orders passed by CIT(A) and that of the Tribunal, we have no hesitation to hold that the two Authorities below and the Tribunal, proceeded on the legal principle without making an in-depth study on the facts situation. The settled legal principle is that the law has to be applied to the facts of the given case and not in the reverse. We find that such an exercise has not been undertaken by the AO at the first instance, as a result of which the matter was proceeded solely based upon the interpretation of the law laid down by the Hon'ble Supreme Court in various decisions. We are of the firm view that the fact situation is required to be considered and the Assessing Officer has to then apply legal principle laid down in various decisions and come to a conclusion. Authorities and the Tribunal had made a fact finding exercise to ascertain as to whether there was an inextricable link with the setting up the business. As pointed out by us earlier, in the instant case, the Assessing Officer did not examine such aspect though the assessee has specifically stated in the written submissions dated 18.03.2015. In our considered view, the matter shall be considered afresh by the AO steering clear of the factual position, record his finding on facts and then apply the legal principle. As we have found that such procedure was not followed in the instant case, we deem it appropriate to remit the matter back to the AO for fresh consideration.

Summary

Issues Involved:
1. Taxability of interest earned on short-term deposits from equity funds prior to business commencement.
2. Allowability of expenditure for earning interest income.
3. Deductibility of expenditure debited to Profit & Loss Account against interest income.
4. Classification of interest as capital receipt related to the manufacturing facility.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Short-Term Deposits:
The primary issue is whether the interest earned by the assessee on short-term deposits from equity funds intended for asset purchase before business commencement is a capital receipt or taxable as "Income from Other Sources." The Assessing Officer, CIT(A), and the Tribunal held it taxable under "Income from Other Sources," relying on the Supreme Court’s decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. However, the High Court noted that the authorities did not undertake an in-depth factual analysis to determine if the funds were inextricably linked with setting up the business. The Court emphasized the need for a fact-based approach rather than a mere legal interpretation.

2. Allowability of Expenditure for Earning Interest Income:
The Tribunal did not allow the expenditure incurred for earning the interest income. The High Court found that the Tribunal and lower authorities did not consider the factual context of the funds' deployment. The Court highlighted the necessity of examining whether the expenditure was directly related to earning the interest income and if it should be allowed as a deduction.

3. Deductibility of Expenditure Debited to Profit & Loss Account:
The assessee argued that if the interest income is considered a revenue receipt, the related expenditure of ?2,55,75,842 debited to the Profit & Loss Account should be deductible. The High Court observed that the authorities did not address this contention adequately. The Court indicated that a proper factual analysis is required to determine the deductibility of such expenditure against the interest income.

4. Classification of Interest as Capital Receipt:
The assessee contended that the interest earned should be added to the Capital Work in Progress since it was directly related to the manufacturing facility. The High Court referred to several Supreme Court and High Court decisions, including Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd., which held that interest earned on funds inextricably linked with setting up a business should be treated as a capital receipt. The Court emphasized that the Assessing Officer must examine the factual linkage between the interest income and the business setup process.

Conclusion:
The High Court concluded that the Assessing Officer must re-examine the case, considering the factual context and applying the legal principles correctly. The matter was remitted back to the Assessing Officer for fresh consideration, directing a thorough fact-finding exercise to determine the nature of the interest income and related expenditures. The appeal was allowed, and the Tribunal’s order was set aside, with instructions for a detailed reassessment.