Fixed Deposit interest income during pre-operative period taxable as income from other sources – ITAT

Fixed Deposit interest income during pre-operative period taxable as income from other sources and can not be set off against interest on borrowed money – ITAT

ABCAUS Case Law Citation:
ABCAUS 1267 (2017) (05) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax  (Appeals) [CIT(A)] confirming the order of the Assesseing Officer (‘AO’) taxing the interest earned on Fixed Deposits during pre-operative period when business had not commenced.

Assessment Year : 2012-13
Date/Month of Pronouncement: May, 2017

Important Case Laws Cited/relied upon:
Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (SC)
Bokaro Steel Ltd., Vs. CIT (SC)
CIT Vs. Karnataka Power Corporation (SC)
Bongaigaon Refinery & Petrochemicals Ltd. (SC).
CIT Vs. Govinda Choudhury & Sons (SC)
CIT Vs. Karnal Co-operative Sugar Mills Ltd. (SC)
CIT Vs. Autokast Ltd. (SC)
CIT Vs. Raasi Cement Ltd.

Brief Facts of the Case:
The appellant assessee company was involved in developing, maintaining warehouses and godowns etc.. During the relevant year, the work of developing operational facilities was in progress and the assessee company had capitalised all expenditures under the head ‘preoperative expenses’. Assessing Officer (AO) noticed that the assessee had earned interest income on Fixed Deposits and had claimed set-off towards the capital expenditure.

The assessee was asked to explain why the interest income earned from Fixed Deposits should not be brought to tax under the head ‘other sources’. The Assessee explained that it had taken a loan from Bank and the amount of unutilised loan was kept in FD in another bank. It was contended that the said interest was set-off to the borrowed interest and accordingly, the same was not taxable as assessee had not commenced the business.

However the AO was not convinced by the submissions of the assessee and disallowed the set off claim and brought the interest earned on FDs to tax under the head ‘income from other sources’.

Aggrieved, the assessee went in appeal before the CIT(A). However CIT(A) relying on various case laws and decisions of Hon’ble Supreme Court came to a conclusion that interest was taxable

Observations made by the Tribunal:
The Tribunal observed that the assessee, even though had borrowed funds had not utilised them for the purpose of project and had kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicated that the funds were not utilised for the purpose of business in the project construction. On these facts alone, the set-off could not be given.

The ITAT observed that in the case of Tuticorin Alkali Chemicals and Fertilizers, the Hon’ble Supreme Court had confirmed and analysed the taxability of interest earned during the construction period and also held that the same could not be set-off to the interest paid on borrowed funds. It was clearly held that the amounts are to be brought to tax under the head ‘Other Sources’. The same view was expressed in other decisions of Hon’ble Supreme Court.

The Tribunal stated that if the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. It opined that in the instant case, the interest earned on FDs had no connection with the project/construction activity, the same had to be brought to tax under the head ‘Other Sources’.

The Tribunal also pointed out that the Hon’ble jurisdictional High Court had also answered similar questions in favour of the Revenue. The question before the Hon’ble High Court was whether the interest earned on surplus funds deposited in the banks during the installation of the company, the status of the company before commencement of the business. The Hon’ble High Court had held that such interest had to be separately treated as income from other sources and could not be taken as part of the capital structure following the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.

Held:
The appeal filed by the assessee was dismissed.