2018 (6) TMI 1401 - HC - Income Tax

Interest income pre-operations not taxable: Tribunal dismisses Revenue's appeal

The Appeal filed by Revenue against the Order of the Income Tax Appellate Tribunal concerning the taxation of interest income earned by the ... Interest income earned on bank deposits - Income made out of share capital received from the Reserve Bank of India - to be taxed as “Income from Other Sources” - or to be reduced from the capital cost of the project - Tribunal following the decision of‘Commissioner of Income Tax Bihar – II, Patna Vs. Bokaro Steel Limited’[1998 (12) TMI 4 - SUPREME COURT] which distinguished the earlier view of ‘Tuticorin Alkali Chemicals & Fertilizers Vs. Commissioner of Income Tax’ [1997 (7) TMI 4 - SUPREME COURT] and held that the interest income earned by the Assessee-Company on bank deposits made out of share capital received by it from the Reserve Bank of India could not be taxed as “Income from Other Sources” as the said interest income was earned prior to commencement of operations of the company during the construction period. Also in the case of ‘Commissioner of Income Tax v. Karnataka Urban Infrastructure and Development and Finance Corporation [2006 (2) TMI 114 - KARNATAKA HIGH COURT] held that such interest income would go to reduce the capital cost of the project and is on the capital account and the same cannot be taxed during the relevant year in which such interest income is earned. Held tht:- No substantial question of law arises in the present case and the Appeal filed by the Revenue is without merit and liable to be dismissed. The Appeal is accordingly dismissed. We express our concern and anguish at the tendency of the Revenue Department to file unnecessary appeals u/s. 260-A of the Act even though the issues are ex facie covered by the decision of the jurisdictional High Courts or even the Hon’ble Supreme Court of India. The substantial question of law essentially means that a question of law which is not already settled by the Constitutional Courts can only fall within the ambit of Section 260-A of the Act and therefore repetitive filing of such appeals by the Tax Department who are expected to be serious and bonafide litigants in the Constitutional Courts is a matter of concern. It is expected of the concerned Authorities who approve filing of such appeals u/s. 260-A of the Act, to bonafide apply their mind to such aspects of the matter and only after recording appropriate reasons for need to file such appeals and need to get substantial question of law genuinely arising from the Order of the Tribunal determined by Constitutional Courts Issues involved:1. Appeal filed by Revenue against the Order of the Income Tax Appellate Tribunal regarding the taxation of interest income earned by the Assessee-Company during the construction period.2. Interpretation of whether interest income earned on bank deposits made out of share capital should be taxed as 'Income from Other Sources' or used to reduce the capital cost of the project.3. Consideration of relevant judgments by the Hon'ble Supreme Court and the High Court in similar cases.4. Assessment of the legal position regarding the taxation of interest income earned before the commencement of business operations.Analysis:1. The Revenue filed an appeal under section 260-A of the Income Tax Act against the Order of the Income Tax Appellate Tribunal concerning the taxation of interest income earned by the Assessee-Company during the construction period for Assessment Year 2011-12. The Tribunal, following the decision of the Hon'ble Supreme Court in a similar case, held that the interest income could not be taxed as 'Income from Other Sources' as it was earned prior to the commencement of operations of the company.2. The Tribunal, referring to previous judgments, determined that the interest income earned on bank deposits made out of share capital should go to reduce the capital cost of the project and not be taxed during the relevant year. The Tribunal considered the purpose of the share capital received by the Assessee-Company and the nature of the interest income earned during the construction period.3. The Counsel for the Revenue acknowledged a recent decision by the Hon'ble Supreme Court reiterating that interest earned before the commencement of business operations is not liable to be taxed and can be deducted against public issue expenses incurred by the Company. The Supreme Court's rationale emphasized that if the income accrued is incidental and not the prime purpose of the act, it should not be taxed. The interest earned was linked to the requirement of the company to raise share capital and was adjustable towards the expenditure involved for the share issue.4. Considering the legal position on the issue, the Court found no substantial question of law arising in the case and concluded that the Appeal filed by the Revenue lacked merit and was dismissed. The Court expressed concern over the tendency of the Revenue Department to file unnecessary appeals when the issues are already settled by the higher courts. The Court emphasized the need for serious and bonafide litigation by the Tax Department and cautioned against repetitive filing of appeals without genuine legal questions.This detailed analysis highlights the key legal arguments, interpretations of relevant judgments, and the final decision of the Court regarding the taxation of interest income earned during the construction period by the Assessee-Company.