2020 (10) TMI 656 - AT - Income Tax

Characterization of income - interest received on fixed deposit during construction period - income from other sources or capital receipt - HELD THAT - Assessee company is a public limited company and the share application money was kept pending for allotment for a long time. As specifically asked questions to the assessee like Date of receipt of share application money allotment to shareholders?, Whether the company has followed the relevant rules/provisions of the Companies Act in this regard?, If the shares have not been allotted within 60 days from the date of receipts then the discloser policy in the balance sheet?, Whether it should be treated as current liability or otherwise and treatment in the books of account of the company?, Use of share application money during pendency for allotment? , Applicability of company deposit rules and its classification in the balance sheet utilization of interest or interest on such deposit and taxability as per the Income Tax Act, 1961?, fixed deposit is a short term fixed deposit or long term fixed deposit and/or auto renewal system in the bank and after maturity the utilization of the interest? As assessee could reply only the date of allotment of shares as per balance sheet note No.4.2, which is 29.05.2014 and the rest were remained unanswered. Therefore, the ld. AR submitted that let the AO may examine the above questions which are unanswered. Thus with the consent of both the parties for sending back to the file of AO for the examination of above questions for deciding the issue raised as aboveafresh, we remit the matter back to the file of AO for fresh adjudication in the light of the above questions and taxability of interest income as per Income Tax Act, 1961. - Appeal of the assessee is allowed for statistical purposes

Summary

Issues Involved:
1. Legality and arbitrariness of the AO's order.
2. Classification of interest on FDR and Flexi deposits as revenue receipt or capital receipt.
3. Treatment of capital receipt as revenue.

Issue-Wise Detailed Analysis:

1. Legality and Arbitrariness of the AO's Order:
The assessee contended that the AO's order was illegal, arbitrary, contrary to evidence on record, and made without application of mind, thereby warranting its quashing or annulment.

2. Classification of Interest on FDR and Flexi Deposits:
The core issue was whether the interest received by the assessee on fixed deposits during the construction period should be classified as income from other sources or as a capital receipt. The AO treated the interest as income from other sources, relying on the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. The CIT(A) upheld this classification.

The assessee argued that the interest was inextricably linked to the project and should be treated as a capital receipt. The assessee cited several judgments, including:
- DCIT v. M/s Radhikapur (West) Coal and Mining Pvt. Ltd., where the Tribunal held that interest earned on funds brought for business activity could not be classified as income from other sources.
- PCIT v. M/s Banknote Paper Mill India Pvt. Ltd., where the Karnataka High Court held that interest income earned prior to the commencement of operations during the construction period could not be taxed as income from other sources.

The assessee emphasized that the funds were parked in banks to earn interest for meeting day-to-day project costs, and the interest income was utilized for project expenses, thereby being inextricably linked to the construction of the railway line.

3. Treatment of Capital Receipt as Revenue:
The assessee argued that the interest income should reduce the cost of the project as it was a capital receipt. The CIT(A) had misconstrued the judgment of the Supreme Court in Tuticorin Alkali Chemicals, and the Delhi High Court's interpretation in Indian Oil Panipat Power Consortium Ltd. v. ITO was more applicable, where interest earned on funds for business purposes was classified as a capital receipt.

Additional Points Raised:
- The assessee was a Special Purpose Vehicle (SPV) for constructing a railway line, with funds provided by joint venture partners.
- The construction agreement with RVNL stipulated that any expenditure by RVNL would incur interest, which was adjusted against dues.
- The AO's assessment added interest on FDR and Flexi deposits as income from other sources, which the CIT(A) partially upheld.

Tribunal's Decision:
The Tribunal found that the assessee had parked share application money in fixed deposits and earned interest, which was shown in the balance sheet. The Tribunal noted that the share application money was pending allotment for a long time and raised several questions regarding the treatment and utilization of these funds.

The Tribunal remitted the matter back to the AO for fresh adjudication, directing the AO to examine the unanswered questions related to the receipt and allotment of share application money, compliance with the Companies Act, utilization of funds, and taxability of interest income. The AO was instructed to decide the case after a detailed examination of documents and relevant rules.

Conclusion:
The appeal was allowed for statistical purposes, with the case remitted back to the AO for fresh adjudication. The AO was directed to conduct a thorough examination and the assessee was instructed to cooperate for an early disposal of the case.