2023 (9) TMI 1617 - HC - Income Tax

Correct head of income - interest earned is from the funds received as grants from the Government, for construction of buildings of the Police Department - Treatment of interest income from grants as income from other sources or capital income - HELD THAT - Interest earned is not of borrowed funds. The assessee is a construction corporation under the State, engaged in the construction of buildings for the Police Department. The construction is carried on by the Corporation with grants given by the Government. The grants given by the Government are parked in fixed deposits which earned interest. It has to be emphasized that the assessee is not carrying out the construction for the purpose of setting up of business or for expansion of a business; but is engaged in the activity of construction itself, with the funds made available by the Government. The interest income earned from the grants made by the Government for the purpose of construction of buildings for the Police Department can only be treated as income from other sources. It is not an activity inextricably connected with the construction of buildings and it does not in any manner reduce the cost of construction; as in the case of interest earned on borrowed funds parked in short term deposits, with which borrowed funds the construction is carried out. In the case of the assessee herein the funds parked in deposits, out of the grants received, are surplus funds; since the amounts earned by the assessee from the deposit of such funds are set-off from the grants for the subsequent year. The principle in Tuticorin Alkali Chemicals and Fertilizers Ltd. 1997 (7) TMI 4 - SUPREME COURT applies squarely and not that of Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT The circular of the State Government providing for deduction of grants in the successive years to the extent of the interest earned from the grants of the earlier year, cannot regulate the taxability under the Income Tax Act. If at all, income tax is deducted from the interest earned, the Corporation would be entitled to request the Government to not deduct the amounts paid as income tax from the grants of the subsequent years. The circular issued by the State Government regulating the business/transaction between the Government and it s Corporation cannot have any effect on the taxability of the interest income which is deemed to be income from other sources u/s 56 of the Income Tax Act. There is no question of any deduction being permitted, as permissible u/s 36 (i)(iii) of the Act, which is with respect to interest paid on borrowed capital for the purpose of business or profession, there is no such factual ground raised herein.

Summary

Issues:
1. Assessment order under Section 143(3) of the Income Tax Act
2. Whether interest earned from deposits made by the assessee is liable to be computed in the total income
3. Applicability of specific grounds for judicial review
4. Service of assessment order on the assessee
5. Interpretation of decisions by the Supreme Court and High Court
6. Taxability of interest earned by the assessee from grants received for construction
7. Treatment of interest income from grants as income from other sources
8. Effect of circular by State Government on taxability of interest income
9. Applicability of Section 36(i)(iii) for deduction of interest paid on borrowed capital

Analysis:
The judgment pertains to a writ petition challenging an assessment order under Section 143(3) of the Income Tax Act, questioning the inclusion of interest earned on deposits made by the assessee in the total income. The key issue is whether the interest income, derived from grants received for construction, should be considered as income from other sources. The court highlighted the absence of jurisdictional error or violation of natural justice, allowing adjudication despite the availability of an appellate remedy. The department claimed to have uploaded the assessment order on the website, countering the petitioner's claim of non-service. The petitioner cited legal precedents, but the court differentiated them as related to borrowed funds, not grants.

Regarding the taxability of interest income, the court emphasized that the grants received by the assessee were utilized for construction, not business expansion, making the interest income taxable as income from other sources. The court distinguished the case from scenarios involving borrowed funds and short-term deposits, where interest could be viewed as capital receipts post-business commencement. The court rejected the applicability of circulars regulating grants and emphasized that interest income from grants is taxable under Section 56 of the Income Tax Act.

Furthermore, the court clarified that no deduction under Section 36(i)(iii) for interest on borrowed capital was applicable in this case. Ultimately, the court dismissed the writ petition, concluding that the interest income from grants for construction should be treated as income from other sources, rejecting the petitioner's arguments based on legal precedents related to borrowed funds.