Interest on fixed deposits during construction period held not taxable as FDRs were not made out of borrowed fund

Interest on fixed deposits during construction period held not taxable as FDRs were made out of share application money and not borrowed fund

ABCAUS Case Law Citation:
ABCAUS 2046 (2017) (08) ITAT

Assessment Year :  2009-10

Important Case Laws Cited/relied upon by the parties:
Tuticorin Alkali Chemicals and Fertilizers Ltd V/s CIT
DCIT V/s VGR Foundations (298 ITR 132);(MAD)
Indian Oil Panipat Power Corporation V/s ITO (315 ITR 255)(Del)
M/s Island Star Mall Developers P.Ltd V/s ACIT
M/s Kaygee Lopares India Pvt Ltd V/s ACIT

Brief Facts of the Case:
The respondent assessee was a private limited company engaged in hotel construction and hospitality services. It was under the process of setting up and the total Work-in-Progress as as at the year end was Rs.38,08,01,798/-.

During the relevant year, the assessee had earned interest on fixed deposit to the tune of Rs. 94,07,568/- on fixed deposits at banks. The said FDR were purchased out of the share application money received by the assessee for the construction of hotel. Since the funds were not required in the present and near future , the same were put in the fixed deposits. The said interest income from FDRs was reduced and adjusted against the capital work in progress.

The assessee had had filed its return of income declaring an income of Rs.4,39,504/- and claimed refund on TDS on interest income on FDRs.

The Assessing Officer (AO) issued a show cause notice to the assessee as to why interest of Rs.94,07,568/- received should not be brought to tax under the head “income from other sources”,

The AO after considering the reply of the assessee, rejected the submissions of the assessee and assessed the unterest income on FDRs as income from other sources by relying on the decision of the Hon’ble Supreme Court.

Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A), who allowed the appeal of the assessee.

Contention of the Responding Assessee:
It was submitted that assessee rightly reduced the interest on fixed deposits which were sourced out of share application money received for the purpose of its project. The said money was put in fixed deposits in Banks on commercial expediency and prudent business considerations when the said funds were not required immediately in the construction activity.

It was contended that since the said fixed deposits were made out of the share application money which was owned money of the company and not the borrowed funds and therefore, the decision of the Hon‟ble Supreme Court was not applicable at all as it was distinguishable on facts.

It was submitted that the case of the assessee was directly covered by various other decisions and therefore the order passed by the CIT(A) was a reasoned decision.

Observations made by the Tribunal:

The ITAT noted that the following facts were undisputed: f

(1) the funds were raised by way of share application money by the assessee

(2) and when the same were not required immediately in the construction activity, the money was put into the Banks in short term deposits which yielded interest.

(3) The said interest was reduced from the capital work in progress as at the year end and thus capitalized on the ground that the interest was received out of own money and not out of the borrowed funds.

It was noted that the CIT(A) after following the ratio laid down by the Madras High Court and also after following the decisions of the Hon’ble Supreme Court decided the issue in favour of the assessee.

It was noted that the decision of the Hon’ble Supreme Court which was relied by the Revenue, was distinguishable on facts and therefore not applicable to the present case.

Held:
The ITAT upheld the order of CIT(A).