2019 (8) TMI 843 - AT - Income Tax

Taxability of interest income from short term fixed deposits - interest earned on short term fixed deposits is necessarily should be reduced from work in progress OR taxable under the head income from other sources - HELD THAT - We find that the assessee has earned interest income from short term fixed deposits kept in bank out of unutilized funds available in respect of money borrowed for the purpose of execution of project and the same has been reduced from working progress. We, further noted that an identical issue has been considered by the Co-ordinate Bench in the case of Hazaribag Ranchi Expressway Ltd Vs. ITO 2018 (11) TMI 1660 - ITAT MUMBAI , where under identical set of facts and also after considering various judicial precedents, including the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals fertilizer Ltd. vs CIT 1997 (7) TMI 4 - SUPREME COURT held that interest income from short term fixed deposits kept in bank out of funds borrowed for the purpose of project is assessable under the head income from business, consequently during construction period of project, it needs to be reduced from working progress. - appeal filed by the assessee is allowed

Summary

Issues Involved:
1. Taxability of interest income of ?1,46,89,403/-.
2. Deduction of interest payment of ?4,38,83,558/- against interest income.
3. Addition of interest income to capital work in progress.
4. Liability for payment of interest under section 234B.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income of ?1,46,89,403/-:
The primary issue was whether the interest income earned from short-term fixed deposits should be taxed under "Income from other sources" or "Income from business and profession." The assessee argued that the interest earned should be considered business income and reduced from the capital work in progress, as the funds were earmarked for project development. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest income should be taxed under "Income from other sources." The AO cited various judgments, including the Hon’ble Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs CIT, to support the view that interest earned on unutilized borrowed funds parked in fixed deposits does not constitute business income. The ITAT, however, referred to a similar case, Hazaribag Ranchi Expressway Ltd. vs. ITO, where it was held that such interest income should be treated as business income and reduced from the capital work in progress during the construction period. Consequently, the ITAT directed the AO to treat the interest income as business receipts.

2. Deduction of Interest Payment of ?4,38,83,558/- Against Interest Income:
The assessee claimed a deduction of the interest payment against the interest income. The CIT(A), relying on the Supreme Court's judgment in Tuticorin Alkali Chemicals & Fertilisers Ltd., held that the interest payable on borrowed funds cannot be adjusted against interest income assessable under "Income from other sources." The Supreme Court had clarified that the expenditure would be deductible if the business had commenced, which was not the case here. Hence, the CIT(A) denied the deduction.

3. Addition of Interest Income to Capital Work in Progress:
The assessee alternatively requested that if the interest income is taxed under "Income from other sources" and the deduction of interest payment is not allowed, then the interest income should be added to the capital work in progress. The ITAT, following the precedent set in the Hazaribag Ranchi Expressway Ltd. case, directed that the interest earned from short-term fixed deposits should be considered as part of business receipts and reduced from the capital work in progress during the project implementation period.

4. Liability for Payment of Interest Under Section 234B:
The assessee contested the liability for interest payment under section 234B. However, this issue was not elaborated upon in the judgment, and the primary focus remained on the taxability of the interest income and the deduction of interest payments.

Conclusion:
The ITAT ruled in favor of the assessee, directing the AO to treat the interest income from short-term fixed deposits as business income and reduce it from the capital work in progress during the project implementation period. The appeal filed by the assessee was allowed.