2023 (4) TMI 640 - HC - Income Tax

Characterization of receipt - revenue or capital receipts - interest earned by the assessee from borrowed funds (short-term/temporary deposits) - whether these amounts of interest would be liable to be taxed or would be exempted income? - HELD THAT - When an assessee who is involved in the task of setting up of a project places the unutilized part of the capital funds in short term bank deposits and earns interest thereupon the same would be added to the capital funds and hence it would definitely have an inextricable link with the project cost. Thus such interest income cannot be considered to be profit earned by the assessee and would definitely have to be treated as capital gains and cannot be clubbed to revenue receipts. Assessee rightly claimed this amount as exempted income under the head of capital gains. Interest received by the respondent assessee from short term deposits made out of unutilized capital subsidy unutilized debt funds unutilized equity funds received as capital during the formative years till the project was completed was rightly claimed by the assessee under the head of capital receipts. Revenue s stand that this interest income should be treated as revenue receipts so as to make it taxable income is not acceptable in view of the law as laid down in the case of Bokaro Steel Ltd. 1998 (12) TMI 4 - SUPREME COURT - No substantial question of law.

Issues Involved:
1. Whether the interest earned by the assessee from borrowed funds (short-term/temporary deposits) can be capitalized or not.
2. Whether the interest income from short-term deposits in banks from unutilized capital subsidy should be treated as capital receipt or income from other sources.
3. Whether the letter/clarification from the Ministry of Chemicals & Fertilizers (MoCF), Government of India can override the provisions of the Income Tax Act, 1961 regarding the treatment of interest from short-term deposits in banks.

Summary:

Issue 1: Capitalization of Interest Earned from Borrowed Funds
The appeals questioned whether the interest earned by the assessee from borrowed funds (short-term/temporary deposits) could be capitalized. The court observed that the interest income derived from short-term bank deposits made from unutilized funds received by the public sector undertaking during the formative years of the project was rightly claimed by the assessee as capital receipt. The court noted that the unutilized part of the capital raised for setting up the project was parked in short-term savings, creating an inextricable link between the interest received and the project setup. Thus, such interest income was treated as capital gains and not revenue receipts.

Issue 2: Treatment of Interest Income from Short-Term Deposits
The court examined whether the interest income from short-term deposits in banks from unutilized capital subsidy should be treated as capital receipt or income from other sources. The court referred to the Supreme Court's decision in Commissioner of Income Tax, Bihar II, Patna Vs. Bokaro Steel Ltd., which held that interest received from short-term deposits during the formative period of a project is a capital receipt. The court emphasized that the interest income was derived from the temporary parking of capital subsidy, equity, and borrowed funds, which were inextricably linked to the project. Therefore, the interest income was rightly claimed as capital receipts and could not be taxed as revenue receipts.

Issue 3: Override of Income Tax Act by MoCF Clarification
The court addressed whether the letter/clarification from the Ministry of Chemicals & Fertilizers (MoCF) could override the provisions of the Income Tax Act, 1961 regarding the treatment of interest from short-term deposits in banks. The court noted that the MoCF had issued guidelines stating that the interest earned from the temporary parking of capital subsidy would be treated as part of the capital subsidy, reducing the amount of capital subsidy sought from the Government. The court held that the ITAT correctly relied on this clarification and the Supreme Court's precedent to conclude that the interest income was a capital receipt.

Conclusion:
The court concluded that the appeals did not involve any substantial question of law and upheld the ITAT's decision that the interest income earned from short-term deposits of unutilized borrowed funds was a capital receipt. The appeals were dismissed as they did not merit admission.

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