Taxability of interest on surplus project funds turns on direct linkage to capital raising or asset acquisition, with limited set-off allowed.
Interest earned on temporarily surplus project funds kept in fixed deposits is generally taxable as income from other sources, unless it is directly and inextricably linked with acquisition of assets or raising share capital. Where the interest arises from the public issue process, it may be adjusted against public issue expenses; any balance remains taxable as revenue income. Depreciation on a non-factory building was disallowed because the asset was not used in business and the project had not been commissioned. A challenge to notice under section 143(2) and the jurisdiction of the Addl. CIT was rejected, and the assessment was not treated as void.
Issues: (i) Whether interest earned on fixed deposits out of public issue proceeds or term loan funds was taxable as income from other sources or liable to be set off against the cost of the project or public issue expenses; (ii) whether depreciation on the non-factory building was allowable; and (iii) whether the assessment proceedings were invalid for want of valid notice and jurisdiction.
Issue (i): Whether interest earned on fixed deposits out of public issue proceeds or term loan funds was taxable as income from other sources or liable to be set off against the cost of the project or public issue expenses.
Analysis: The interest earned on surplus funds kept in fixed deposits was held to be taxable as revenue income and not an accretion to capital, following the jurisdictional High Court. The Court distinguished cases where the deposit was directly linked with acquisition of assets or the project itself. However, the interest of Rs. 17,70,413 earned in the course of the public issue was treated as inextricably linked with raising share capital and, to that extent, was directed to be adjusted against public issue expenses; any excess, if remaining after such adjustment, was to be taxed as income from other sources.
Conclusion: The issue was decided partly against the assessee and partly in its favour, limited to set-off of the public-issue-related interest against related expenses.
Issue (ii): Whether depreciation on the non-factory building was allowable.
Analysis: Depreciation was disallowed on the footing that the asset had not been used in business and the project had not been commissioned during the relevant year. The Court found no infirmity in the disallowance.
Conclusion: The issue was decided against the assessee.
Issue (iii): Whether the assessment proceedings were invalid for want of valid notice and jurisdiction.
Analysis: The challenge to the notice under section 143(2) and to the jurisdiction of the Addl. CIT was not accepted. The objection was held to have no merit, and the assessment was not found void on that ground.
Conclusion: The issue was decided against the assessee.
Final Conclusion: The appeal for the first assessment year succeeded only to the limited extent of adjustment of interest relatable to the public issue against related expenses, while all other challenges failed; the appeal for the second assessment year was rejected.
Ratio Decidendi: Interest earned on temporarily surplus project funds is taxable as revenue income unless it is directly and inextricably linked to acquisition of assets or raising share capital, in which case it may be adjusted against the related capital or issue expenses.
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