VNG Automotive Private Limited Vs ACIT (Delhi High Court)
Conclusion: Interest earned on funds kept in bank during business setup, when those funds were directly linked to the project, was a capital receipt and not taxable as “income from other sources”.
Held: Assessee-company had deposited unused funds in bank while setting up its business and earned interest. The company adjusted this interest against pre-operative expenses but AO treated it as taxable income and reopened the assessment. Assessee company argued that the money was not surplus, it was meant for business purposes like machinery, land and technical fees, and only temporarily parked in bank. Revenue argued that business had not started and the deposit was not compulsory, so interest should be taxed as income from other sources. Commissioner (Appeals) allowed the assessee’s claim holding that the interest was inextricably linked to project setting-up and hence capital in nature. However, the ITAT reversed this finding and held that the case was covered by Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT and interest income was taxable as “income from other sources”. It was held that funds in the present case were not lying as surplus but the same were earmarked to facilitate the balance payment for plant and machinery etc. for which advances were made by the assessee. The funds were inextricably linked to the setting up of the business of the assessee, and as such, would be covered by the judgment of the Supreme Court in Bokaro Steel Ltd (supra), and not Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). The court held that since the interest was linked to the project, it was capital in nature and should be adjusted against pre-operative expenses. The ITAT order was set aside and appeal was allowed.
