2021 (5) TMI 390 - AT - Income Tax

Interest income on fixed deposits received - capital receipt OR income from other sources - whether pre commencement of expenses can be set off against interest income? - Additions made by the AO, deleted by the CIT(A) - HELD THAT - In the initial year, the assessee himself had offered it as income from other sources and in the following year it has reduced from the cost of the project up to the interest received on FDR. It is also not clear from the orders of the authorities below as well as submission of the ld. AR that when the fixed deposits were made and advances were given to Pact Securities and Financial Services Ltd. When the Bench asked a specific question to assessee that what was the description of the fixed deposits and advances and utilization of income received on fixed deposits and advances, the ld. AR was unable to give any explanation to the said question. He did not produce any terms and conditions regarding the advances given. We find substance in the written submissions filed by the Ld. DR. Res-judicata does not apply in the Income-tax Act. Earlier the interest was earned from fixed deposits and in this AY the assessee has given some advances to others also and could not respond to our query during the course of hearing. Exercising the powers u/s 254 of the IT Act and relying on the decision of Bombay High Courts full Bench decision in the case of Ahmedabad Electricity CO. Ltd 1992 (4) TMI 29 - BOMBAY HIGH COURT , we observed that section 254 involving the statutory expression may pass such orders as it thinks fit confers widest possible jurisdiction on the Tribunal. AO and the Sr. DR has discussed this issue and facts of the case in detail and has relied on the decision of the Hon ble Apex court in the case of Tuticorin Alkali 1997 (7) TMI 4 - SUPREME COURT . We support and restore the order of the AO and quash the order passed by the CIT(A). AO has rightly treated the interest received during the construction period from the money parked as fixed deposits and interest on advance as income from other sources and netting off of capital expenditure from the interest has rightly been disallowed. In support of our above decision, we rely on the judgements of ITAT, Delhi Special Bench Third Member case in the case of National Thermal Power Vs. IAC 1987 (10) TMI 92 - ITAT DELHI-A As assessee has relied on number of judgements, which are not applicable to the facts of the case of the assessee. We allow the grounds raised by the revenue.

Issues Involved:
1. Erroneous Order of CIT(A)
2. Classification of Interest Income from Fixed Deposits (FDs)
3. Capitalization of Interest Income
4. Deliberate Investment of Idle Funds in FDs
5. Any other grounds raised during the hearing

Issue-wise Detailed Analysis:

1. Erroneous Order of CIT(A):
The Revenue contended that the order of CIT(A) was erroneous both in law and facts. The Tribunal examined the facts and legal principles applicable to the case, ultimately finding that the CIT(A)'s decision was not erroneous. The Tribunal upheld the CIT(A)'s order based on the precedent set in the assessee's own case for the previous assessment year.

2. Classification of Interest Income from Fixed Deposits (FDs):
The main issue was whether the interest income on fixed deposits received by the assessee was capital in nature and whether pre-commencement expenses could be set off against this interest income. The Tribunal referred to several judicial precedents, including the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, which held that interest earned on short-term deposits of funds borrowed for setting up a factory is taxable as "income from other sources." The Tribunal also considered the decision in Indian Oil Panipat Power Consortium Ltd., which distinguished between interest earned on surplus funds and funds inextricably linked to the project. The Tribunal concluded that the interest income in question was not inextricably linked to the project and should be treated as "income from other sources."

3. Capitalization of Interest Income:
The Tribunal analyzed whether the interest income earned by the assessee could be capitalized and set off against preoperative expenses. The Tribunal referred to the decision in the case of Maharashtra Airport Development Co. Ltd., which held that interest earned on funds not immediately required for business purposes should be treated as income from other sources. The Tribunal found that the assessee's funds were not kept in fixed deposits at the instance of any statutory authority and were therefore not inextricably linked to the project. Consequently, the interest income could not be capitalized.

4. Deliberate Investment of Idle Funds in FDs:
The Tribunal examined whether the assessee's act of keeping idle funds in fixed deposits was deliberate and unrelated to its actual business activity. The Tribunal found that the assessee had invested surplus funds in fixed deposits to earn interest, which was a deliberate act not related to the business activity. The Tribunal upheld the AO's decision to treat the interest income as "income from other sources."

5. Any other grounds raised during the hearing:
The Tribunal considered various other judicial precedents and arguments presented by both parties. It found that the interest income earned during the construction period from money parked as fixed deposits and interest on advances was rightly treated as "income from other sources" by the AO. The Tribunal quashed the order passed by the CIT(A) and restored the AO's order.

Conclusion:
The Tribunal allowed the Revenue's appeal, holding that the interest income earned by the assessee on fixed deposits and advances during the construction period should be treated as "income from other sources" and not capitalized. The Tribunal's decision was based on a detailed analysis of judicial precedents and the specific facts of the case.

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