Case Law Details
Assessee, even though has borrowed funds has not utilized them for the purpose of project and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. This indicates that the funds are not utilized for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given. The issue of interest earned on FDs of surplus funds are considered by the Honorable Supreme Court in a series of judgements. The first of which is the decision of Honorable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., [227 ITR 172] (SC) in which the Honorable Supreme Court has confirmed and analyzed the tax ability of interest earned during the construction period and also held that the same cannot be set-off to the interest paid on borrowed funds. Honorable Supreme Court in the said case has clearly held that the amounts are to be brought to tax under the head ‘Other Sources’. The same was reiterated in later judgements of CIT Vs. Autokast Ltd., [248 ITR 110] (SC) and also in other decisions of Honorable Supreme Court. The decision of Bokaro Steel Ltd., Vs. CIT [236 ITR 315] (SC) pertaining to the receipts arising in the project/ construction activity was reiterated in Bongaigaon Refinery & Petrochemicals Ltd., [251 ITR 329] (SC) (supra). Thus, there is clear line of demarcation. 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. The interest on FDs have no connection with the project/ construction activity, then the same is to be brought to tax under the head ‘Other Sources’. The order of the CIT(A) has clearly demarcated the distinguishing features of various judgements of Honorable Supreme Court and has correctly came to the conclusion that interest on FDs is taxable during the pre-operative period under the head ‘Other Sources’.
Full Text of the ITAT Order is as follows:
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 30-06-2016 on the issue of tax ability of interest earned on Fixed Deposits during pre-operative period when business has not commenced. Assessee has raised the following grounds:
“1. The CIT(A) erred in law and facts of the case in considering the interest earned during the construction period out of borrowed funds, as income from other sources.
2. The CIT(A) ought to have consider the fact that your Appellant has commenced business on staring the construction, therefore interest on FDR ought to have been reduced from the pre- operative expenses and capitalized.
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