Interest earned on borrowed funds/unutilized capital subsidy is capital receipts – High Court

Interest earned on borrowed funds/ unutilized capital subsidy are capital receipts

In a recent judgment, Hon’ble Guwahati High Court has held that Interest earned on borrowed funds/ unutilized capital subsidy are capital receipts 

ABCAUS Case Law Citation:
ABCAUS 3986 (2024) (04) HC

Important Case Laws relied upon:
Commissioner of Income Tax, Trivandrum Vs. Autokast Limited, (2002) 9 SCC 607
Bongaigaon Refinary and Petrochemicals Limited Vs. Commissioner of Income Tax, Assam, (2001) 10 SCC 289
Commissioner of Income Tax Patna Vs. Bokaro Steel Ltd., Bokaro, (1999) 1 SCC 645
Principal Commissioner of Income Tax, -7 Vs. Triumph Realty Pvt. Ltd. 2022 SCC OnLine Del 916
The Principal Commissioner of Income Tax Vs. M/s. Bajaj Herbals Pvt. Ltd. 2022 0 Supreme (SC) 307

In the instant case, the Income Tax Department had filed an appeal challenging the order passed by the Income Tax Appellate Tribunal (ITAT/Tribunal) in holding that the interest income earned from the short-term deposits in banks from unutilized capital subsidy/unutilized borrowed funds was capital receipt and not income from other sources.

The respondent assessee was a public sector enterprise and was promoted to undertake a Project in Assam approved by the Cabinet Committee of Economic Affairs.

The Project had not been set up/made operational during the years under consideration. The assessee received capital subsidy from the MoCF for setting up the Project. The MoCF specifically prescribed the purposes and the manner in which the subsidy was to be utilized and the assessee was under an obligation to utilize the capital subsidy as specified by the MoCF.

A separate Bank Account was maintained by the assessee for such capital subsidy and any excess amount not being utilized was temporarily parked in short-term deposits in Banks and interest was earned thereupon. These deposits were made in accordance with the guidelines of the Department of Public Enterprises.

The unutilized amounts from equity capital and borrowed funds garnered for setting up the project were also parked in short term deposits in Banks and interest income was derived. Clarifications were received from the MoCF indicating that the interest earned from the temporary parking of such capital subsidy shall be treated as part of capital subsidy and it will correspondingly reduce the amount of capital subsidy sought from the Government. The assessee respondent accordingly claimed such interest income as capital receipts i.e. a part of capital subsidy itself.

However, the interest income earned by the assessee by way of short-term deposits placed with the banks out of unutilized subsidy, unutilized equity and unutilized borrowed funds were added by the Assessing Officer (AO) as revenue receipts under the Head of interest from other sources.

The respondent assessee contended that the action of the AO was contrary to law as laid down by the Hon’ble Supreme Court. Reliance was also placed on the judgment of Delhi High Court.

The Hon’ble High Court after going through all the judgments relied upon by the respondent, opined that 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. Thus, the respondent assessee rightly claimed this amount as exempted income under the head of capital gains.

It was held that the 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. The Revenue’s stand that this interest income should be treated as revenue receipts so as to make it taxable income was not acceptable in view of the law as laid down by the Hon’ble Supreme Court.

Accordingly, the appeal was dismissed as not involving any substantial question of law.

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