Interest income classified as business income due to link with project, allowance of revenue expenditure remanded for fresh assessment.

Hazaribag Ranchi Expressway Ltd. Versus ITO-14 (1) (4) erstwhile Income Tax Officer, 10 (1) (4), Mumbai

Hazaribag Ranchi Expressway Ltd. Versus ITO-14 (1) (4) erstwhile Income Tax Officer, 10 (1) (4), Mumbai - TMI Issues Involved:
1. Classification of interest income as "Income from Other Sources" versus "Business Income."
2. Deduction of interest expenditure against taxable income.
3. Allowability of revenue expenditure.
4. Capitalization of revenue expenditure.
5. Liability to pay interest under Section 234D of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Issue No. 1: Classification of Interest Income
The core issue was whether the interest income of Rs. 46,03,457/- should be classified as "Income from Other Sources" or "Business Income." The assessee argued that the interest income from deposits should be treated as business income, citing various legal precedents. The Tribunal examined the facts and noted that the assessee, a special purpose vehicle (SPV), was engaged in a project with the National Highways Authority of India and had not commenced its business operations. The funds borrowed for the project were kept in fixed deposits to meet future interest obligations, which was a business exigency. The Tribunal referenced several judgments, including those from the Delhi High Court and Supreme Court, which supported the treatment of such interest income as business income when it is inextricably linked to the business activity. Consequently, the Tribunal concluded that the interest income should be treated as business income.

Issue No. 2: Deduction of Interest Expenditure
The assessee claimed a deduction of Rs. 1,74,11,160/- against the interest income of Rs. 46,03,457/- under the head "Income from Other Sources." However, this issue was not pressed by the assessee during the proceedings. Therefore, the Tribunal decided this issue in favor of the revenue, against the assessee.

Issue Nos. 3 & 4: Allowability and Capitalization of Revenue Expenditure
The assessee claimed revenue expenditure of Rs. 7,58,233/- and alternatively sought to capitalize this amount and add it to the capital work in progress. The Assessing Officer (AO) had declined the claim. The Tribunal noted that the assessee did not press for the allowability of the revenue expenditure (Issue No. 3) but pressed for the capitalization (Issue No. 4). Since the CIT(A) had not adjudicated this issue, the Tribunal set aside the CIT(A)’s findings and remanded the matter back to the AO for fresh consideration, directing the AO to provide an opportunity for the assessee to be heard.

Issue No. 5: Liability to Pay Interest under Section 234D
The assessee contested the liability to pay interest under Section 234D of the Income Tax Act, 1961. However, this issue was not elaborated upon in the judgment.

Conclusion:
The appeal was allowed for statistical purposes. The Tribunal ordered the interest income to be treated as business income and remanded the issue of capitalization of revenue expenditure back to the AO for fresh adjudication. The other issues were either not pressed or decided in favor of the revenue. The order was pronounced in the open court on 28.11.2018.