2017 (11) TMI 849 - AT - Income Tax

Nature and taxability of interest earned on Fixed Deposits with banks - Held that - In the instant case it has to be deduced that interest on FCCB funds temporarily placed in fixed deposits awaiting deployment in the construction of new projects is a capital receipt, since the FCCB proceeds are inextricably linked with the construction of new projects, as the same have been raised for that purpose alone. Thus it has to be held that the interest earned by the assessee by temporarily parking the FCCB funds in banks, pending its full deployment in the ongoing construction of hotel projects, was in the nature of capital receipt and was thus, required to be set-off against the cost of capital work-in-progress. Thus, assessee succeeds on this aspect. Disallowance under section 14A of the Act - Held that - On this aspect, without going into much detail, it is directed that the disallowance be limited to the extent of exempt income in terms of the ratio of the ratio of the Hon ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT, (2015 (9) TMI 238 - DELHI HIGH COURT) .

Summary

Issues Involved:
1. Taxability of interest earned on Fixed Deposits.
2. Taxability of income from time share business.
3. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Fixed Deposits:

The primary dispute in this appeal concerns the tax treatment of ?3,09,25,159/- earned as interest on Fixed Deposits. The appellant, a company engaged in the hotel business, had borrowed funds through Foreign Currency Convertible Bonds (FCCBs) to finance its expansion plans. Pending full deployment of these funds in ongoing projects, the appellant placed the funds in bank deposits, which generated the interest income in question. The appellant reduced this interest income from the cost of borrowings capitalized for the ongoing projects, in accordance with generally accepted accounting principles and Accounting Standard-16.

The Assessing Officer, however, taxed the interest income as "income from other sources" based on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, and denied the appellant's plea for a corresponding deduction of expenses under section 57(iii) of the Act. The CIT(A) upheld this decision, noting that the interest earned on bank deposits from "idle funds" should be taxed as "income from other sources," not as a reduction in the cost of capital work-in-progress.

Upon appeal, the Tribunal examined whether the interest income was inextricably linked to the setting up of new hotel projects. The Tribunal referred to the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Limited vs. ITO, which distinguished between surplus funds and funds inextricably linked to the setting up of a project. The Tribunal concluded that the interest income earned from temporarily parked FCCB funds should be treated as a capital receipt, reducing the cost of capital work-in-progress, rather than being taxed as income from other sources. Consequently, the appellant succeeded on this aspect, rendering the alternate plea academic.

2. Taxability of Income from Time Share Business:

The second issue involved the taxability of ?20,16,418/- as income from the time share business. During the hearing, the appellant's representative stated that the appellant did not wish to press this issue. Consequently, this issue was dismissed as not pressed.

3. Disallowance under Section 14A of the Income Tax Act:

The final issue pertained to a disallowance of ?10,81,701/- made by the Assessing Officer under section 14A of the Act concerning exempt income of ?18,311/- earned by the appellant. The Tribunal directed that the disallowance be limited to the extent of the exempt income, following the Delhi High Court's decision in Cheminvest Ltd. vs. CIT.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the appellant on the primary issue of the tax treatment of interest income from FCCB funds, dismissing the time share business income issue as not pressed, and directing a limited disallowance under section 14A. The order was pronounced in the open court on 03/10/2017.