2024 (6) TMI 1059 - AT - Income Tax

Interest income earned on Fixed Deposits pertaining to prior period commencement of business - treated as capital receipt OR income from other sources - HELD THAT - There is no dispute to the fact that the business activities of the assessee-company had not commenced in the Financial Years (FYs) 2015-16 and 2016-17 as well. AO has given a categorical finding, in this regard, in the assessment order itself. Thus, the interest earned on FDs during the year was prior to commencement of business of the assessee-company and was in the nature of capital receipt as held in the assessee s own case in the AYs 2013-14 2014-15. The objection of the Department is that the assessee had not shown any nexus between the funds borrowed and the specific investment made by it, is not found relevant as such nexus has to be examined in the year in which the investments were made for the first time. In the present case, the investments were made in the earlier years that is continuing in the current year and the assessee-company is deriving interest income on the Fixed Deposits made by it in the earlier years. Respectfully following the decision of the Co-ordinate Bench in the AYs 2013-14 2014-15 2020 (3) TMI 1194 - ITAT AHMEDABAD we hold that the interest income earned on Fixed Deposits pertaining to the prior period commencement of business was in the nature of capital receipt . As held in that year the preoperative expenses of the assessee has to be adjusted with this capital receipt and only the balance expense, if any, need to be amortized as per provisions of Section 35D of the Act. Accordingly, the CIT(A) had rightly allowed the claim of the assessee.

Summary

Issues:
- Appeal filed by the Department against orders passed by the Ld.CIT(A) for AYs 2016-17 & 2017-18.
- Granting relief to the assessee on account of interest income.
- Whether interest income should be treated as capital receipt or income from other sources.
- Adjudication of both appeals together based on similar issues and facts.

Detailed Analysis:
1. The Department filed appeals against the orders passed by the Ld.CIT(A) for AYs 2016-17 & 2017-18. The appeals were adjudicated together due to the same assessee and similar issues. The lead case was ITA No.294/Ahd/2024 for AY 2016-17, and its findings applied to the other appeal for AY 2017-18.

2. The common grounds of appeal by the Department included challenges to the relief granted to the assessee on interest income. The Department argued that the interest income should be considered taxable income under the head 'Income from other sources' as per legal precedents, despite the assessee declaring it as taxable income in the return.

3. The Ld.CIT(A) partly allowed the assessee's appeal against the assessment order, leading to the Department's appeals. The Department contended that the interest income was not a capital receipt, while the assessee cited a previous decision by ITAT Ahmedabad Bench in favor of treating such income as a capital receipt.

4. The Tribunal considered the previous decision in the assessee's case for AYs 2013-14 & 2014-15, where interest income on Fixed Deposits related to the pre-commencement period of business was treated as a capital receipt. The Tribunal found that the interest earned by the assessee before commencing business was indeed a capital receipt, to be adjusted against pre-operative expenses.

5. The Tribunal noted that the business activities had not started in the relevant financial years, and the interest income was linked to investments made in earlier years. Following the precedent, the Tribunal upheld the Ld.CIT(A)'s decision to treat the interest income as a capital receipt, allowing the assessee's claim.

6. Consequently, the Department's appeals for both AYs 2016-17 and 2017-18 were dismissed based on the findings related to the treatment of interest income as a capital receipt against pre-operative expenses. The Tribunal pronounced the order on 20th June 2024 in Ahmedabad.