2024 (10) TMI 758 - HC - Income Tax

Characterization of receipts - interest income earned by the assessee from the funds received from the Government of India for setting up of the Company - capital receipt v/s revenue receipt - Whether taxable as income from other sources ? - HELD THAT - As categorically mandated that the funds and income earned out of the funds provided by the Government shall be utilized only for the purpose for which they are released. It has also been clarified that any interest income from the said funds consequent on bank deposits, shall also be utilised only for the purpose of the project. Therefore it is evident that the deposits and the income are inextricably linked with the setting up of the project. It is not in dispute that the setting up of the project was not over and is in the process. The funds disbursed and utilised are stage-wise. The portion of the funds kept in short-term deposits could not be termed as surplus amounts which could be utilised as per the wish and will of the Company. The funds, with the income derived therefrom are to be used exclusively for the setting of the project. Thus understanding the characteristics of the amount, we hold that the interest income on the short-term deposits of the funds infused by the Government are, in the case at hand, in the nature of capital receipt and not revenue receipt . We cannot agree with the finding of the authorities to the contrary. The substantial question of law posed, is answered accordingly and in favour of the assessee.

Summary

Issues Involved:

1. Whether the interest income earned by the assessee from funds received from the Government of India for setting up a company is taxable as "income from other sources."

Issue-wise Detailed Analysis:

1. Nature of Interest Income:
The primary issue in the appeals was whether the interest income earned by the assessee from the funds provided by the Government of India for setting up an Integrated Vaccine Complex should be treated as "income from other sources" and thereby taxable. The assessee contended that the interest income was a capital receipt, integrally connected with the setting up of the project. The funds were infused with the specific mandate that both the principal and any income generated therefrom were to be used exclusively for the project. Therefore, the interest income could not be considered as "income from other sources."

2. Precedents and Legal Principles:
The judgment referred to the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income Tax, where it was held that interest income from surplus funds invested in short-term deposits is taxable as "income from other sources." However, this was distinguished by the Apex Court in Commissioner of Income Tax v. Bokaro Steel Ltd., where it was held that receipts intrinsically linked with the construction of a plant are capital receipts, not taxable income. The court also considered other judgments, such as Roads & Bridges Development Corporation of Kerala Ltd. v. Assistant Commissioner of Income Tax and Principal Commissioner of Income Tax v. FACOR Power Ltd., which supported the view that interest income linked to the setting up of a project is a capital receipt.

3. Application to the Present Case:
The court examined the facts of the case, including a communication from the Government of India, which clarified that the funds and any income earned from them were to be used solely for the project. It was emphasized that the funds were not surplus and that the interest income was inextricably linked to the project's setup. The court concluded that the interest income was a capital receipt, not a revenue receipt, and therefore not taxable as "income from other sources."

4. Conclusion:
The court held that the interest income earned from the short-term deposits of the funds provided by the Government was in the nature of a capital receipt. The substantial question of law was answered in favor of the assessee, and the appeals were allowed. The orders of the lower authorities, which treated the interest income as taxable, were set aside.