2022 (8) TMI 1182 - AT - Income Tax

Addition u/s 56 - income from other sources - interest income earned on surplus funds during the pre-commencement of business - contention of assessee that the deposits are inextricably linked with the funds taken for capital projects - margin money deposit for bank guarantee and deposits for foreign currency buyer s credit - AO found that the said FDRs had been made out of surplus fund available to the assessee - As observed that, the assessee has failed to established that, the deposits are inextricably linked with the funds taken for capital projects HELD THAT - As observation made by the Ld. CIT (A) without bringing on record of any materials and without appreciation of the relevant records on the issue to came to such conclusion and decided the Appeal in favour of the assessee. The Ld. CIT (A) while relying on the documents produced by the Assessee, ought have called for the remand report from the Assessing Officer and should have examined issue. But on going though the Order of the CIT (A), we are unable to understand the basis for such observations and the conclusion arrived by the CIT(A) in favour of the Assessee. Thus, the said approach of the CIT (A) is found to be erroneous. CIT (A) should examine the cash/fund flow statement to decide as to whether the interest on FDR s from the surplus funds or not. Further the Ld. CIT(A) has to call for the remand report from the AO and after providing the opportunity to the Assessee and there after shall come to the conclusion in the matter. If the Assessee is found with any earned interest on FD made out of the surplus funds, such income should be treated and assessed as income from other sources as held in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd 1997 (7) TMI 4 - SUPREME COURT We deem it appropriate to remit the issue in dispute to the file of Ld. CIT(A) to decide in light of our above observations. Accordingly we partly allow the revenues grounds.

Summary

Issues:
1. Taxability of interest income on surplus funds pre-commencement of business for Assessment Years 2014-15 and 2013-14.
2. Applicability of judicial precedents in determining tax liability on interest income.

Analysis:
1. The appeals filed by the Revenue challenged the CIT(A)'s orders for the Assessment Years 2014-15 and 2013-14 regarding the taxability of interest income earned on surplus funds pre-commencement of business. The Revenue contended that the interest income should be taxed under section 56 of the Income Tax Act. The CIT(A) had deleted the additions made by the Assessing Officer, citing lack of evidence linking the deposits to capital projects.

2. The Assessing Officer had added the interest income to the assessee's income from other sources, emphasizing the absence of proof linking the deposits to capital projects. Relying on judicial precedents like Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT (1997) 227 ITR 172 (SC) and CIT vs. Coromandal Cement Ltd (1998) 234 ITR 412, the Assessing Officer computed the income with the interest added.

3. The CIT(A) reversed the Assessing Officer's decision, stating that the available funds did not conclusively indicate surplus funds for investment. However, the ITAT found the CIT(A)'s approach erroneous, emphasizing the need for a thorough examination of fund flow statements and remand reports to determine the taxability of interest income on fixed deposits made from surplus funds.

4. The ITAT directed the CIT(A) to reassess the issue based on the principles outlined in the judicial precedents, highlighting that interest income from surplus funds should be treated as income from other sources. The ITAT partially allowed the Revenue's appeals for statistical purposes, remanding the matter to the CIT(A) for further examination and clarification in light of the observations made.

5. Ultimately, the ITAT allowed the Revenue's appeals for statistical purposes, emphasizing the importance of a detailed assessment based on the principles established in relevant judicial precedents to determine the tax liability on interest income earned on surplus funds pre-commencement of business for the respective assessment years.