2015 (7) TMI 115 - AT - Income Tax

Addition on account of interest income - revenue v/s capital receipt - diversion of interest at source - Held that - The interest earned on FDR before commencement of project was to be treated as capital receipt to be adjusted preoperative expenses, since it had a direct link with setting up power project. The interest was not assessable as income from other sources. Section 4 and Section 56 of the Income Tax Act, 1961. We also find that similar decision was also relied upon by the assessee s counsel in the case of Gujrat Corporation Ltd. 2012 (11) TMI 181 - Gujarat High Court wherein it was held that the assessee corporation was promoted by Government for augmenting power supply. The share capital was provided by Government. The interest on short term deposits from share capital was paid to Government as per agreement. The interest income was diverted at source. It was not assessable in its hands. So the income did not belong to the assessee, but that was of the Govt. of Gujrat, and therefore, it cannot be taxed in the hands of the assessee. we find considerable cogency in the submissions and the case laws relied upon by the Ld. Counsel of the assessee, therefore, we are of the view that the interest received on FDR s of ₹ 5,91,850/- in the present case is not to be taxed as income from other sources in the hands of the assessee company, hence, we delete the addition made by the AO and confirmed by the Ld. CIT(A) - Decided in favour of assessee. Addition on account of sale consideration of the assessee treated as unexplained income under section 68 - Held that - as per the Ld. CIT(A) it is the immediate requirement of cash that had made the assessee to bring in picture the entire paper transaction of sale and purchase of cloth, though in effect no such transaction took place. In view of the above, the genuineness of sales transaction as well as purchase transaction remaining unproved, we find considerable cogency in the finding of the Ld. CIT(A) wherein he has observed that the addition made by the AO uls 68 of IT Act is correct on account of unproved purchases and subsequent unproved sales thereby leading to unexplained cash credit u/s 68 of IT Act, 1961 at ₹ 49,28,006/-. Keeping in view of the aforesaid facts and circumstances of the case as explained above, in our considered opinion, the Ld. CIT(A) has passed a well reasoned on the issue in dispute - Decided against assessee.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 5,91,850/- on account of interest income treated as capital receipt.
2. Confirmation of addition of Rs. 49,28,006/- on account of sale consideration treated as unexplained income under section 68 of the I.T. Act.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Rs. 5,91,850/- on Account of Interest Income Treated as Capital Receipt:

The assessee argued that the interest income of Rs. 5,91,850/- from fixed deposits should be treated as a capital receipt because it was earned from a grant sanctioned by the Central Government. The grant was intended for infrastructure development in the textile sector, and the interest earned was to be either adjusted in the next release or refunded to the Government. The assessee contended that the interest should not be treated as income from other sources, citing decisions from the Delhi High Court and Gujarat High Court where interest earned on funds meant for specific projects was treated as capital receipts.

The Revenue authorities, however, relied on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, which held that interest income is of a revenue nature unless received as damages or compensation. They argued that the interest income was not inextricably linked to the setting up of the business and should be taxed under the head "Income from Other Sources."

After considering both sides, the Tribunal found merit in the assessee's argument, noting that the interest earned was indeed linked to the grant and should be treated as a capital receipt. The Tribunal distinguished the case from Tuticorin Alkali Chemicals and Fertilizers Ltd., citing relevant High Court decisions and concluded that the interest income of Rs. 5,91,850/- should not be taxed as income from other sources. Thus, the addition was deleted.

2. Confirmation of Addition of Rs. 49,28,006/- on Account of Sale Consideration Treated as Unexplained Income Under Section 68:

The assessee had shown sales and purchases of Rs. 49,28,006/- in its trading account. The AO found discrepancies, such as the lack of details in the sales invoices, absence of customer names and addresses, and no transportation details, leading to the conclusion that the transactions were unproved. The AO added the amount as unexplained income under section 68, suspecting that the transactions were fabricated to generate cash for purchasing land in Madhya Pradesh.

The assessee argued that the transactions were genuine, supported by account payee cheques for purchases, and that the sales were made in cash due to the immediate need for funds. The assessee cited a case from the Kolkata Bench of ITAT, arguing that if sales were unproved, the amount would remain in closing stock.

The Tribunal noted the AO's detailed findings, including the timing of payments and the lack of evidence for the transactions. The Tribunal agreed with the CIT(A) that both the sales and purchases were unproved, leading to the conclusion that the transactions were fabricated. Consequently, the addition of Rs. 49,28,006/- as unexplained income under section 68 was upheld.

Conclusion:

The appeal was partly allowed. The addition of Rs. 5,91,850/- on account of interest income was deleted, while the addition of Rs. 49,28,006/- on account of unexplained income was upheld. The Tribunal's decision was pronounced in the Open Court on 24/6/2015.