2023 (7) TMI 650 - AT - Income Tax

Characterization of income - Determine the nature of interest income earned - business has already been set-up though it may not have commenced - assessee has reduced proportionate interest from cost of project on the basis of ratio of debt and equity whereas Ld. AO has assessed the same as Income from other sources - HELD THAT - There is a difference in set-up of business and commencement of business. Once the business is set up though it may not have yet commenced, the assessee would be eligible to claim the business expenditure as revenue expenditure. On the same very reasoning, any income arising after set-up of the business would be revenue in nature and assessable to tax. The assessee has generated business income and claimed revenue expenditure including finance cost. However, mere fact that the deposits were linked with projects would not alter the character of the income after the business has been set-up. As rightly held by Ld. CIT(A), the said bifurcation is only an artificial bifurcation. The terms of the project may require the assessee to make fixed deposits but the same could not alter the Tax treatment of the interest income so earned by the assessee. The interest arises to the assessee only because of creation of fixed deposits which is nothing but assessable as income from other sources . CIT-A was correct to concluded that it was pure and simple interest on deposits which had to be considered as income from other sources only. - Decided against assessee.

Summary

Issues involved: Determination of nature of interest income earned by the assessee for Assessment Years (AY) 2011-12, 2012-13 & 2014-15.

AY 2012-13:
The appellant raised various grounds challenging the order of the Commissioner of Income Tax (Appeals) including the treatment of interest income from bank deposits, arguing that it should be deducted from the cost of the project. The main issue was to determine the nature of interest income earned by the assessee, whether it should be considered as 'Income from other sources' as assessed by the AO or reduced from the project construction cost as claimed by the assessee.

Assessment Proceedings:
The assessee, engaged in construction and operation of power plants, admitted a loss and earned interest income during the pre-operative stage of the power plant. The AO proposed to treat the entire interest income as 'income from other sources' based on the principle laid down by the Supreme Court. The assessee relied on various case laws to support its position but the AO assessed the entire interest income as 'income from other sources'.

Appellate Proceedings:
During the appellate proceedings, the assessee reiterated that the interest income should be adjusted against the cost of the project as it was earned during the construction phase. The CIT(A) upheld the AO's decision, stating that the interest income was not related to any business venture and should be considered as 'income from other sources'. The CIT(A) found the bifurcation done by the assessee to be artificial and upheld the AO's treatment of the interest income.

Findings and Adjudication:
The Tribunal observed that once the business is set up, any income arising thereafter is revenue in nature and assessable to tax. The interest income accrued on fixed deposits after the business was set up and should be considered as 'income from other sources'. The Tribunal agreed with the CIT(A) that the interest income was not related to any business activity and rejected the assessee's claim to adjust it against the project cost. The Tribunal found that the case laws cited by the assessee were distinguishable and supported the revenue's position. The appeals for AY 2011-12 and 2014-15 were dismissed based on similar facts and issues.

Decision:
The Tribunal upheld the CIT(A)'s adjudication and dismissed all the appeals, concluding that the interest income should be treated as 'income from other sources' and not adjusted against the project cost.