2019 (4) TMI 1284 - AT - Income Tax

Taxability of interest income earned prior to commencement of business - no commercial operations - assessee had claimed that the interest income was capital receipt to be set off against the expenditure incurred during this period - AO held that interest income is taxable under the head income from other sources - set off expenditure also decline - HELD THAT - Whenever an assessee is in the process of setting up of the business, if any, income arises under any of the heads except under the head profits and gains of business, then such income has to charged to tax under that particular head. As far as interest received from short term deposits which were not immediately required, were held to be taxable following the decision of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT 1997 (7) TMI 4 - SUPREME COURT . Only those sums which were received from contractors, which we can say were inextricably connected with the construction activities, were held to be not taxable, rather than they were held to be reduced from the total capital expenditure. The decision of the Delhi High Court in the case of Indian Oil Panipat Power Consortium Limited vs. ITO 2009 (2) TMI 32 - DELHI HIGH COURT is not applicable to the facts of the assessee s case before us. Thus, it is clear that in the case before us, assessee was still at the pre-commencement stage and during this phase, the assessee had raised equity funds which was invested in fixed deposits of the Banks as well as the holding company and the assessee had earned interest on the same. The same has to be taxed as income from other sources in the light of the decision of the Hon'ble Supreme Court in the case of M/s Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT (supra). Because the shareholder of the company was in a position to pass resolution or issue any letter, it cannot change the character of the source of the income.The business was not set up during the relevant previous year and the interest earned from the Bank deposits is to be assessed as income from other sources and it cannot be set off against the capital expenditure. Ground of appeal of the assessee is dismissed. Unless and until the machinery of the project is fully installed and the project becomes operational and the order is executed, it cannot be said that the business has been set up. Before us, the fact is that the assessee had not yet commenced construction of the vaccine project. Therefore, it is clear that business was not set up and there was no question of claiming any expenditure. Set off of business loss against the addition made by the Assessing Officer. - HELD THAT - As discussed earlier, the business of the assessee was not set up and it had not commenced commercial operations. In such a situation, there is no business loss which is to be computed under the head income from business. As such, there is no question of set off of interest income against business loss. Accordingly, this ground of appeals of the assessee is also rejected.

Summary

Issues Involved:
1. Taxability of interest income received during the construction period.
2. Applicability of the Supreme Court's ratio in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.
3. Set off of business loss against additions made by the Assessing Officer.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income Received During Construction Period:
The primary issue was whether the interest income earned by the assessee during the construction period should be set off against the construction expenses or treated as income from other sources. The assessee argued that the interest income was inextricably linked to the setting up of the plant and should be capitalized. The CIT(A) and the Assessing Officer held that the interest income was taxable under the head 'income from other sources.’ The CIT(A) relied on the Supreme Court judgment in Sitaldas Tirathdas, which distinguished between application of income and diversion of income by overriding title. The CIT(A) concluded that the Ministry's letter was merely an obligation to apply income and did not amount to diversion by overriding title. The CIT(A) also referenced the ITAT, Delhi's decision in Mussoorie Dehradun Development Authority, which supported the application of income rather than diversion by overriding title. Consequently, the CIT(A) confirmed the addition of ?4,17,75,000 made by the Assessing Officer as income from other sources.

2. Applicability of the Supreme Court's Ratio in the Case of Tuticorin Alkali Chemicals & Fertilizers Ltd.:
The assessee contended that the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. was not applicable as the interest income was mandated to be used for the integrated vaccination project by the Government of India. The CIT(A) dismissed this argument, emphasizing that the interest income was taxable as it was not diverted by overriding title. The Tribunal upheld this view, referencing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which stated that interest earned on surplus funds invested in short-term deposits before the commencement of business is taxable as income from other sources. The Tribunal also cited the Supreme Court's decisions in Bokaro Steel Ltd., Karnataka Power Corporation, and Coromandal Cements Ltd., which reinforced the principle that interest income during the pre-production stage from short-term deposits is taxable as income from other sources.

3. Set Off of Business Loss Against Additions Made by the Assessing Officer:
The assessee sought to set off the business loss of ?7,88,636/- against the additions made by the Assessing Officer. The Assessing Officer and the CIT(A) rejected this claim, stating that the business had not commenced, and hence, there could be no computation of business income or loss. The Tribunal concurred, noting that since the business was not set up and commercial operations had not commenced, there was no business loss to be computed or set off. The Tribunal emphasized that the interest income earned during the pre-commencement stage must be taxed as income from other sources, and no set-off against business loss was permissible.

Conclusion:
The Tribunal dismissed the appeals and stay petitions filed by the assessee. The interest income earned during the construction period was held to be taxable under the head 'income from other sources,' and no set-off against business loss was allowed. The Tribunal's decision was consistent with the Supreme Court's rulings in Tuticorin Alkali Chemicals & Fertilizers Ltd. and subsequent cases, emphasizing the taxability of interest income from short-term deposits during the pre-commencement stage.