2017 (8) TMI 168 - AT - Income Tax

Interest income from share capital used for project construction is not taxable; Tribunal upholds scrutiny assessment selection.

Income-Tax Officer Versus Bank Note Paper Mill India P. Ltd.

The Tribunal ruled that interest income earned on bank deposits made from share capital during the construction period should reduce the capital cost of ... Interest income earned during the construction period on bank deposits made out of share application money received - taxable as 'Income from other sources' or reduce the capital cost of the plant which is being set up by the assessee-company - Held that:- Interest earned should only go to reduce the capital cost of the project to be set up by the respondent company and it should not be brought to tax, as the interest is earned on capital account. See CIT v. Karnataka Power Corporation [2000 (7) TMI 72 - SUPREME Court] and CIT v. Karnataka Urban Infrastructure and Development and Finance Corporation and [2006 (2) TMI 114 - KARNATAKA High Court]. The appeal of the Revenue is dismissed. Issues Involved:1. Taxability of interest income earned from fixed deposits made out of share capital during the construction period.2. Jurisdiction of the Assessing Officer in selecting the case for scrutiny assessment under section 143 of the Income-tax Act.Issue 1: Taxability of Interest IncomeThe primary issue in this case is whether the interest income earned by the assessee during the construction period on bank deposits made out of share application money should be taxable as 'Income from other sources' or should reduce the capital cost of the plant being set up.The Assessing Officer (AO) treated the interest income as taxable under 'Income from other sources,' relying on the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC). The AO argued that the interest income from surplus funds before commencing business should be taxed accordingly.However, the Commissioner of Income-tax (Appeals) disagreed, relying on the Supreme Court's decisions in CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) and CIT v. Karnal Co-operative Sugar Mills Ltd. [2000] 243 ITR 2 (SC). The Commissioner concluded that the interest earned was inextricably linked to the capital expenditure and should reduce the pre-operative expenses rather than being treated as revenue income. The Commissioner noted that the funds were temporarily deposited in banks due to financial planning and were not surplus funds intended to earn interest.The Tribunal upheld the Commissioner's view, emphasizing that the interest income was earned on deposits made out of share capital received for setting up the plant. The Tribunal cited the Supreme Court's distinction in Bokaro Steel Ltd., where interest receipts directly connected to the construction of the plant were considered capital receipts, not taxable income. The Tribunal also referenced the jurisdictional High Court's decision in CIT v. Karnataka State Agricultural Produce Processing and Export Corporation Ltd. [2015] 377 ITR 496 (Karn), which held that interest earned on grants during the construction period should reduce the capital cost of the project.Issue 2: Jurisdiction for Scrutiny AssessmentThe assessee contended that the AO had no jurisdiction to convert the case to scrutiny assessment as it did not fall under the specified scrutiny guidelines. The Commissioner of Income-tax (Appeals) confirmed that the case was selected for scrutiny under CASS (Computer Assisted Scrutiny Selection).The Tribunal dismissed the assessee's cross-objections on this issue, noting that the Commissioner had clearly established that the case fell under CASS. Since the Tribunal had already adjudicated the merits of the addition in favor of the assessee, the issue of jurisdiction became academic and infructuous.Conclusion:The Tribunal dismissed the Revenue's appeal, holding that the interest earned on bank deposits made out of share capital during the construction period should reduce the capital cost of the project and not be treated as taxable income. The Tribunal also dismissed the assessee's cross-objections regarding the jurisdiction for scrutiny assessment, as the case was validly selected under CASS. The order pronounced on March 17, 2017, upheld the Commissioner's decision to allow relief to the assessee on the primary issue.