2020 (10) TMI 508 - AT - Income Tax

Interest earned on FDRs as income from other sources - assessee is under construction and business of the assessee has not commenced and the funds on which interest was earned were inextricably linked to the setting up of the Hotel and thus the said interest income has been netted off against the interest paid by the assessee and also ignoring the submissions and evidences placed on record - HELD THAT - Interest on FDRs during the period has been netted off against interest paid by the assessee which is identical to the fact of earlier Assessment Year 2012-13. There is no change in the circumstances in this year. CIT(A) was not correct in confirming the addition by taking different opinion from the earlier A.Y. 2012-13 taken by the earlier CIT(A). It is pertinent to note that once the ECB loan which is to be utilized for capital expenditure only, then, any interest earned on funds temporarily parked in FDRs is inextricably linked with the setting up of hotel of the assessee, and the same should be held as capital receipts only and is permitted to be set off against the capital expenditure as per the provisions of Income Tax Act. The order of the CIT(A) is set aside. Hence, appeal of the assessee is allowed.

Summary

Issues:
1. Classification of interest earned on FDRs as "income from other sources" for Assessment Year 2013-14.

Detailed Analysis:
The appellant, a company running a five-star hotel in Goa, had its hotel under construction during the relevant year. The appellant had taken an ECB for funding the construction, which was parked in FDRs. The Assessing Officer observed that interest earned on FDRs was not shown as income under "Income from Other Sources" as per Section 56 of the Income Tax Act, despite the appellant receiving interest as per 26AS. Consequently, an addition of the interest amount was made. The CIT(A) dismissed the appeal filed by the assessee.

In a previous year (Assessment Year 2012-13), a similar issue arose, and the Tribunal decided in favor of the assessee. The Tribunal held that interest earned on funds temporarily parked in FDRs, linked to setting up a hotel, should be treated as capital receipts and set off against capital expenditure. The Tribunal cited judicial precedents to support this position. The Tribunal emphasized that if funds are raised for setting up a plant or acquiring a capital asset, and the interest earned on such funds parked in FDRs is inextricably linked with the plant's activities, it should be considered a capital receipt, not income from other sources.

Based on the principles established in earlier judgments, the Tribunal held that the interest earned on FDRs during the period, which was netted off against interest paid, should be treated as capital receipts linked to setting up the hotel. The Tribunal overturned the CIT(A)'s decision, emphasizing consistency with the earlier ruling for Assessment Year 2012-13. Consequently, the appeal of the assessee was allowed.

In conclusion, the Tribunal's decision reiterated that interest earned on funds parked in FDRs, when linked to setting up a plant or acquiring a capital asset, should be treated as capital receipts and set off against capital expenditure. The judgment emphasized consistency with previous rulings and upheld the appeal of the assessee for the Assessment Year 2013-14.