2018 (9) TMI 1935 - AT - Income Tax

Interest Income Reclassified as Business Income; Expenditure Deduction Remanded for Review

Jorabat Shillong Expressway Ltd. Versus ITO Mumbai

The Tribunal partly allowed the appeal by ruling that the interest income should be treated as business income due to its connection with the project. The ... Interest income from deposit - income from business or income from other sources - HELD THAT:- The assessee company has been incorporated for setting up of infrastructure facilities being construction of toll road between Hazaribag and Ranchi which is under construction. The assessee earned the interest income upon the borrowed funds of ₹ 46,03,457/- which was deducted from the borrowing cost to arrive at the figure of capital work in progress of ₹ 1,86,25,83,284/-. The promoters of the company had introduced money by way of share capital and also obtained credit facilities from the banks and institutions. The total funds were exclusively meant for use for setting up of the infrastructure facility. The lenders disbursed the funds at specified intervals and the said funds were required to be used for the purpose of setting up of the project. Needless to say that the on account of the time difference, the funds may lies with the bank resultantly earning the interest income in dispute. These funds were deposit in the bank for a short period for the purpose of utilizing the same in the project. Eventually, raising the interest is clearly on account of business exigency. Taking into account, all the facts and circumstances, we are of the view that the finding of the CIT(A) is not justifiable hence the same is hereby ordered to be set aside and we treat the interest income as business income of the assessee. - Decided in favour of the assessee Allowance of revenue expenses - HELD THAT:- On appraisal of the order passed by the CIT(A), we noticed that the CIT(A) has not decided the issue on the basis of this fact that the same was not raised before the AO. Anyhow this issue is required to be adjudicated in accordance with law. In the said circumstances, we set aside the finding of the CIT(A) and the issues are required to be adjudicated at the end of the CIT(A) in the interest of justice in accordance with law by giving an opportunity of being heard to the assessee. Accordingly, these issues are decided in favour of the assessee against the revenue. Issues Involved:1. Treatment of interest income as business income or income from other sources.2. Deduction of interest payment against taxable income.3. Allowability of revenue expenditure.4. Capitalization of revenue expenditure.5. Levy of interest under Section 234B of the Income Tax Act, 1961.Issue-wise Detailed Analysis:Issue Nos. 1 & 2: Treatment of Interest IncomeThe primary issue was whether the interest income of Rs. 31,13,010 should be treated as business income or income from other sources. The assessee argued that the interest income from deposits should be treated as business income, relying on precedents such as Indian Oil Panipat Power Consortium Ltd. vs. ITO and Bokaro Steel Ltd. The Tribunal noted that the assessee, a special purpose vehicle promoted by IL&FS Transportation Network Ltd., had entered into a Concession Agreement with the National Highways Authority of India for a road project. The funds borrowed for the project were kept in a bank, generating interest. The Tribunal observed that the interest income was inextricably linked to the business exigency of the project. Citing similar cases where interest income was treated as business income due to its connection with the project, the Tribunal concluded that the interest income should be treated as business income.Issue No. 3: Deduction of Interest PaymentThis issue was contingent on the outcome of Issues 1 and 2. Since the Tribunal decided that the interest income should be treated as business income, there was no need to address the deduction of interest payment separately.Issue Nos. 4 & 5: Allowability and Capitalization of Revenue ExpenditureThe assessee claimed a deduction for revenue expenditure of Rs. 66,77,379. The Tribunal noted that the CIT(A) had not adjudicated this issue, as it was not raised before the Assessing Officer (AO). The Tribunal remanded the matter back to the CIT(A) for adjudication in accordance with the law, ensuring the assessee is given an opportunity to be heard.Issue No. 6: Levy of Interest under Section 234BThe issue of interest under Section 234B was deemed consequential and dependent on the final demand raised against the assessee. Therefore, it did not require separate adjudication.Conclusion:The appeal was partly allowed. The Tribunal ordered the interest income to be treated as business income, remanded the issue of revenue expenditure to the CIT(A) for fresh adjudication, and noted that the issue of interest under Section 234B was consequential. The order was pronounced in open court on 12.09.2018.