Assessee Company, a Himachal Pradesh Govt undertaking, received fund from Govt of Himachal Pradesh towards purchase of Transmission. Due to certain legal entanglements said Transmission could not be purchased for some time and during that time the fund so received was kept by Assessee Company in bank deposits accounts. The Assessee Company earned interest on such deposits in bank but did not consider the same as Income while filing its Return of Income of the year. While doing the scrutiny assessment for the year AO treated the interest received from bank as revenue receipt and charge tax on the same.
Arguments by Assessee
Before AO, Assessee argued that it could not utilize the funds only due to certain legal formalities and hence it cannot be said that it had surplus funds. Assessee placed its reliance on the Delhi High Court decision in the case of Indian Oil Panipat Consortium Power ltd 315 ITR 255. In this case Delhi High Court has held that the interest was earned by the assessee prior to commencement of business and is in the nature of capital receipt. Hence this interest was required to be set off against pre-operative expenses. Assessee argued that since it has received interest prior to purchase of Transmission and the fund was specifically received for such purchase, hence the interest received should be treated as capital receipt and be allowed to be reduced from the cost of Transmission.
Arguments by Revenue
Revenue relied on various other court cases including the Apex court decision in case of Tuticorin Alkali Chemicals & Fertilizers Vs CIT 227 ITR 172. In this case it was held that interest earned on short term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources and cannot be said that interest income is not taxable on the ground that it would reduce interest on borrowed amount which would be capitalized
Decision by Chandigarh Tribunal
In the concluding para, relying on the various case laws, Tribunal upheld the order of CIT(A) and dismissed the appeal filed by the Assessee.
Comments by Author
The test to decide, as to whether the income is revenue in nature or capital receipt, is that if the funds borrowed are just surplus and by virtue of that circumstances they are invested in fixed deposits the income earned in the form of interest will be taxable under the head “Income from other sources” [as per ratios of SC decision in 227 ITR 172]. On the other hand if the income is earned whether by way of interest or in other manner on the funds which are otherwise “inextricably linked” to the setting up of the plant, such income is required to be capitalized to be set off against pre operative expenses [as per ratios of SC decision in 236 ITR 315]. While deciding the case of Bokaro Steel Ltd [236 ITR 315] SC had also discussed the case of Tuticorin Alkali Chemicals & Fertilizers Vs CIT [227 ITR 172] and found that the facts of the present case are different than the facts in Tuticorin Alkali Chemicals & Fertilizers Vs CIT [227 ITR 172].
In the instant case author is of the view that though the ratios of Bokaro Steel Ltd [236 ITR 315] are more applicable than the ratios of Tuticorin Alkali Chemicals & Fertilizers Vs CIT [227 ITR 172] but since the Tribunal is highest facts finding authority High court may not consider the appeal of the Assessee in this case.