2016 (1) TMI 461 - HC - Income Tax

Interest earned on funds raised for business setup in fixed deposits deemed capital receipt; set off against pre-operative expenses

The court concluded that the interest earned on funds raised for setting up a business and temporarily placed in fixed deposits was considered a capital ... Taxability of interest earned on funds as income from other sources - Whether the mode and manner of raising funds on which interest is earned, whether by way of loan or through share capital, is a material consideration in deciding the taxability of interest earned - ITAT concurred with the view of CIT(Appeals) that the interest income earned by the assessee in the pre-commencement period could not be stated to be ‘income from other sources’ - Held that:- In the present case, there is a finding of fact that the money placed in the fixed deposit was inextricably linked with the setting up of the power plant. Thus, the revenue generated on account of interest on the said fixed deposits would be in the nature of a capital receipt and not a revenue receipt. This case has been decided on the basis of this principle and not on the basis that the source of the funds was through raising of share capital and not through borrowings. For the foregoing reasons, we do not find that there is any substantial question of law which arises for our consideration and the very issues which are sought to be raised in the present case had been squarely covered by the decision of this Court in Indian Oil Panipat Power Consortium Limited (2009 (2) TMI 32 - DELHI HIGH COURT ). - Decided in favour of assessee Issues Involved:1. Mode and manner of raising funds and their taxability as income from other sources.2. Link between earning interest on surplus funds and setting up of the power project.3. Applicability of the judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT to the present case.4. Consideration of the judgment in CIT v. Madhya Bharat Energy Corporation Ltd regarding interest earned on FDs and pre-operative expenses.Detailed Analysis:Issue A: Mode and Manner of Raising Funds and Their Taxability as Income from Other SourcesThe revenue questioned whether the mode and manner of raising funds, either through loans or share capital, is a material consideration in deciding the taxability of interest earned on such funds as income from other sources. The court clarified that the source of funds, whether raised by issuing shares or through borrowing, does not alter the principle that if the capital of a company is fruitfully utilized instead of being idle, the income generated is of a revenue nature. However, in this case, the funds were inextricably linked with the setting up of the power plant, making the interest earned a capital receipt.Issue B: Link Between Earning Interest on Surplus Funds and Setting Up of the Power ProjectThe court examined whether the earning of interest on surplus funds is inextricably linked with the setting up of the power project. Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal found that the funds raised as additional share capital were temporarily placed in fixed deposits until they were needed for purchasing machinery and other capital assets. Thus, the interest earned on these deposits was considered inextricably linked with the acquisition of plant and machinery, making it a capital receipt.Issue C: Applicability of the Judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd v. CITThe revenue contended that the judgment in Tuticorin Alkali Chemicals and Fertilizers Ltd v. CIT should apply, where interest earned on surplus funds was treated as income from other sources. However, the court distinguished this case by stating that in Tuticorin Alkali, the funds were surplus and not linked to the setting up of a plant. In contrast, in the present case, the funds were specifically raised for acquiring capital assets and were temporarily placed in fixed deposits, making the interest earned a capital receipt.Issue D: Consideration of the Judgment in CIT v. Madhya Bharat Energy Corporation LtdThe revenue argued that the judgment in CIT v. Madhya Bharat Energy Corporation Ltd, which held that interest earned on FDs cannot be set off as pre-operative expenses, should be considered. The court noted that the facts in the present case were different. The funds were raised for acquiring capital assets and were temporarily placed in fixed deposits, making the interest earned a capital receipt that could be set off against pre-operative expenses, as held in Indian Oil Panipat Power Consortium Ltd.Conclusion:The court concluded that no substantial question of law arose for consideration. The Tribunal correctly relied on the decision in Indian Oil Panipat Power Consortium Ltd, where interest earned on funds raised for setting up a business and temporarily placed in fixed deposits was considered a capital receipt. The appeal was dismissed, affirming that the interest earned in the pre-commencement period was inextricably linked with the acquisition of capital assets, making it a capital receipt set off against pre-operative expenses.