2013 (9) TMI 533 - AT - Income Tax

Interest earned on the parking of share capital to be chargeable under the head Income from other sources or to be capitalized Interest payable on borrowing of such money to be disallowed u/s 14A of the Income Tax Act Held that - Interest cannot be taxed as income from other sources in the hands of the assessee and therefore, the subsequent disallowance of expenses claimed at 10% to earn that income has been infused in the total project cost cannot be disallowed insofar as the whole of the income has been capitalized was rightly considered for revision by the assessee before the Assessing Officer Decided in favor of Assessee. Meaning to the insertion of the proviso to Section 36(1)(iii) - Held that - Interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession was being allowed as deduction u/.s.36(1)(iii) of the Act as revenue expenditure was amended w.e.f. 1.4.2004 when the amount of interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession whether capitalized in the books of account or not for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction, holds true for the income insofar as once having identified that the income from interest is from the Banks where the share capital was parked was to not earn interest to be balanced interest on capital borrowed.

Issues Involved:
1. Taxability of interest income as "income from other sources."
2. Link between interest income and the setting up of the Integrated Steel Plant project.
3. Applicability of case laws, particularly Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT and Bokaro Steel Ltd v. CIT.
4. Treatment of interest income in the context of pre-operative expenses and capital receipts.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income as "Income from Other Sources":
The primary issue was whether the interest income earned from fixed deposits, made from share capital infused by the assessee (a foreign company), should be taxed as "income from other sources." The authorities below had considered the interest income as taxable under this head, following the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT. However, the assessee argued that the interest income should be capitalized and not taxed as income from other sources, as it was directly linked to the setting up of the Integrated Steel Plant project.

2. Link Between Interest Income and the Setting Up of the Integrated Steel Plant Project:
The assessee contended that the interest income earned on the funds, which were temporarily placed in bank deposits, was inextricably linked to the setting up of the Integrated Steel Plant. The funds were initially brought in for acquiring land and developing infrastructure for the project. Due to delays in land acquisition and other procedural hurdles, the funds remained unutilized and were kept in bank deposits, generating interest income. The assessee argued that this interest income should be treated as a capital receipt and set off against pre-operative expenses.

3. Applicability of Case Laws:
The case laws of Tuticorin Alkali Chemicals & Fertilizers Ltd v. CIT and Bokaro Steel Ltd v. CIT were pivotal in the judgment. The authorities below had relied on Tuticorin Alkali, where the Supreme Court held that interest earned on surplus funds should be taxed as "income from other sources." However, the assessee cited the case of Indian Oil Panipat Power Consortium Ltd v. ITO, where the Delhi High Court held that interest earned on funds brought in for a specific purpose (setting up a project) should be treated as a capital receipt. The Tribunal found the facts of the assessee's case similar to Indian Oil Panipat and held that the interest income was directly linked to the project and should not be taxed as income from other sources.

4. Treatment of Interest Income in the Context of Pre-operative Expenses and Capital Receipts:
The Tribunal noted that the interest income earned during the pre-commencement period was in the nature of a capital receipt and should be set off against pre-operative expenses. The funds were infused for acquiring land and developing infrastructure, and the interest earned was a temporary measure to reduce the overall cost of setting up the project. The Tribunal emphasized that the interest income could not be isolated and taxed separately as income from other sources, as it was directly linked to the project cost.

Conclusion:
The Tribunal allowed the appeal for the Assessment Year 2008-09, directing the Assessing Officer to accept the NIL revised return filed by the assessee. For the Assessment Years 2006-07 and 2007-08, the Tribunal restored the matter to the file of the Assessing Officer for de novo consideration, emphasizing that the interest income should be treated as a capital receipt linked to the project and not taxed as income from other sources. The decision was based on the principles laid out in the Indian Oil Panipat case and the facts and figures brought on record by the assessee.

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