2021 (7) TMI 321 - AT - Income Tax

Addition by treating the interest received on STDR made in the pre-commencement period as being income from other sources - whether the interest income received by the assessee on temporary deposit of funds with banks was assessable as income of the assessee or it would go to reduce the cost of borrowings? - HELD THAT - In the instant case, the assessee company has invested borrowed funds, available during the period starting disbursement and availability of funds, and actual utilization for the purposes the funds were borrowed, and therefore surplus in the intervening period, in short term interest bearing deposits with the bank. There is nothing on record to suggest that the assessee company was bound to utilize the interest so earned on such short term deposits to adjust against the interest paid on borrowed capital and there were any end-use restrictions and it was therefore free to use the interest income in any manner it liked and therefore interest earned by investing borrowed capital in short term deposit is an independent source of income not in any manner connected with construction activities which rightly been brought to tax as income under the head income from other sources . Even the ground relating to setting off of interest expenses on borrowed funds U/s 57(iii) against the interest income has been discussed in case of Seshasayee Paper Boards Ltd. 1984 (4) TMI 17 - MADRAS HIGH COURT has decided the same against the assessee. Therefore, respectfully following the same, the interest income has to be brought to tax without allowing any deduction u/s 57(iii) towards interest on borrowed capital. - Decided in favour of revenue.

Summary

Issues Involved:
1. Treatment of interest earned during the pre-operative period.
2. Consideration of explanations/documentary evidence filed by the assessee.
3. Deduction of interest expenditure from interest income under Section 57(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Interest Earned During the Pre-operative Period:
The primary issue was whether the interest of ?3,05,430 earned on Short Term Deposit Receipts (STDR) during the pre-operative period should be treated as "Income from other sources" or adjusted against pre-operative expenses. The assessee argued that the funds were temporarily parked in STDR to minimize interest burden and should be capitalized as pre-operative income. The Revenue, relying on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT, treated the interest as income from other sources. The Tribunal upheld the Revenue's view, distinguishing between the nature of funds in the Tuticorin Alkali case and Bokaro Steel Ltd. case, where income was inextricably linked to the setting up of the plant. The Tribunal concluded that the interest earned on STDR was not inextricably linked to the business setup and should be taxed as income from other sources.

2. Consideration of Explanations/Documentary Evidence Filed by the Assessee:
The assessee contended that the CIT(A) erred in not considering the explanations and documentary evidence supporting the claim that the receipts were capital receipts earned during the pre-operative period. The Tribunal noted that the CIT(A) and AO had considered the relevant judicial pronouncements and found the nature of the funds utilized to earn such income was not inextricably linked to the business. The Tribunal agreed with the lower authorities' findings and upheld the addition made by treating the interest as income from other sources.

3. Deduction of Interest Expenditure from Interest Income Under Section 57(iii):
The assessee argued that if the interest income is treated as income from other sources, the corresponding interest expenditure incurred on borrowed funds used for short-term deposits should be allowed as a deduction under Section 57(iii) of the Income Tax Act. The Tribunal referred to the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. and the Calcutta High Court's decision in Consolidated Fibres and Chemicals Ltd., which held that interest earned on borrowed funds invested in short-term deposits is taxable as income from other sources without allowing any deduction for interest expenditure. The Tribunal upheld the lower authorities' decision, rejecting the assessee's claim for deduction under Section 57(iii).

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the treatment of interest earned during the pre-operative period as income from other sources and rejecting the claim for deduction of interest expenditure under Section 57(iii). The Tribunal's decision was based on the consistent judicial interpretation of the relevant provisions and precedents set by the Supreme Court and High Courts.