2022 (6) TMI 472 - AT - Income Tax

Correct head of income - interest on FD and gain of sale of mutual funds invested out of unutilized borrowed fund - interest earned from temporary fixed deposits and gains on sale of mutual funds during the pre-construction period could be treated as Income from Other Sources or whether the same would qualify as Capital Receipts and hence not in the nature of income - HELD THAT - The assessee company which was formed primarily for the purpose of four laning of the Rohtak Panipat highway and the funds available with the assessee were to be utilised primarily for the above purposes for which the assessee company was set up. Consequentially, the interest / gains earned on fixed deposits/sale of mutual funds was also be to be utilised for the aforesaid purpose. Therefore, in our view, interest/gains earned by the assessee company during the pre-commencement was inextricably linked with the setting up of the capital structure of the assessee company and there was a direct nexus of the funds and income from interest and mutual funds out of the temporary investments and accordingly, the ld. CIT(A) has not erred in law in holding that receipts in question could not be taxed as income from other sources and short term capital gains . - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition made on account of interest on fixed deposits (FD) and gains from the sale of mutual funds.
2. Classification of income from interest and mutual funds as either "Income from Other Sources" or "Capital Receipts."

Issue-wise Detailed Analysis:

Issue 1: Deletion of Addition Made on Account of Interest on FD and Gains from Sale of Mutual Funds
The Revenue challenged the deletion of an addition amounting to Rs. 3,44,84,982/- made by the Assessing Officer (AO) on account of interest on fixed deposits and gains from the sale of mutual funds. The AO had treated these receipts as "Income from Other Sources" under Section 56 of the Income Tax Act, relying on the Supreme Court judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd. 227 ITR 172. The AO argued that since the income was earned during the pre-construction period, it should be taxed as income from other sources and not capitalized to the cost of the project.

Issue 2: Classification of Income from Interest and Mutual Funds
The core issue for consideration was whether the interest earned and gains on mutual funds during the pre-construction period should be treated as "Income from Other Sources" or "Capital Receipts." The assessee contended that the funds were temporarily invested because they could not be immediately utilized for construction activities. The interest and gains were set off against the capital expenditure of the project, making them capital receipts.

The assessee cited several judicial precedents to support their contention:
- Karnataka Power Corporation 247 ITR 268 (SC)
- Indian Oil Panipat Power Consortium Ltd. (2009) 315 ITR 255 (Del.)
- NTPC Sail Power Company Pvt. Ltd. ITA 1238/2011 (Del. HC)
- Bokaro Steel Limited - 236 ITR 315 (SC)
- Bongaigaon Refinery and Petrochemical Co. Ltd. 251 ITR 329 (SC)

The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's argument, stating that the income earned was inextricably linked with the setting up of the capital structure and therefore should be treated as capital receipts. The CIT(A) allowed the appeal, holding that the AO's action was not in order.

The Tribunal, in its analysis, referred to several cases to substantiate its decision:
- Adani Power Ltd. [2015] 61 taxmann.com 355 (Ahmedabad - Trib.): The Tribunal held that interest earned on funds brought for business infusion should be classified as capital receipts and set off against pre-operative expenses.
- Kolkata Metro Rail Corpn. Ltd. [2019] 102 taxmann.com 419 (Kolkata - Trib.): Interest income earned on funds given by the government for project implementation, when kept in fixed deposits, could not be taxed as income from other sources.
- Bangalore Metro Rail Corpn. Ltd. [2022] 135 taxmann.com 268 (Karnataka): Interest accrued from unutilized project funds invested in fixed deposits and mutual funds was not considered revenue receipts.
- Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 181 Taxman 249/315 ITR 255 (Delhi): Interest earned on funds infused for specific business purposes should be treated as capital receipts and set off against pre-operative expenses.

The Tribunal concluded that the interest and gains earned by the assessee during the pre-construction period were inextricably linked with the setting up of the capital structure. Therefore, these receipts could not be taxed as "Income from Other Sources" or "Short Term Capital Gains."

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the interest and gains earned during the pre-construction period were capital receipts and should be set off against the project's capital expenditure. The order was pronounced in the open court on 08-06-2022.