ITAT directs AO to treat interest income as business income, reducing it from capital work in progress

The ITAT ruled in favor of the assessee, directing the AO to treat the interest income from short-term fixed deposits as business income and reduce it from the capital work in progress during the project implementation period. The appeal filed by the assessee was allowed.

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Issues Involved:
1. Taxability of interest income of Rs. 1,46,89,403/-.
2. Deduction of interest payment of Rs. 4,38,83,558/- against interest income.
3. Addition of interest income to capital work in progress.
4. Liability for payment of interest under section 234B.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income of Rs. 1,46,89,403/-:
The primary issue was whether the interest income earned from short-term fixed deposits should be taxed under "Income from other sources" or "Income from business and profession." The assessee argued that the interest earned should be considered business income and reduced from the capital work in progress, as the funds were earmarked for project development. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the interest income should be taxed under "Income from other sources." The AO cited various judgments, including the Hon’ble Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilisers Ltd. vs CIT, to support the view that interest earned on unutilized borrowed funds parked in fixed deposits does not constitute business income. The ITAT, however, referred to a similar case, Hazaribag Ranchi Expressway Ltd. vs. ITO, where it was held that such interest income should be treated as business income and reduced from the capital work in progress during the construction period. Consequently, the ITAT directed the AO to treat the interest income as business receipts.

2. Deduction of Interest Payment of Rs. 4,38,83,558/- Against Interest Income:
The assessee claimed a deduction of the interest payment against the interest income. The CIT(A), relying on the Supreme Court's judgment in Tuticorin Alkali Chemicals & Fertilisers Ltd., held that the interest payable on borrowed funds cannot be adjusted against interest income assessable under "Income from other sources." The Supreme Court had clarified that the expenditure would be deductible if the business had commenced, which was not the case here. Hence, the CIT(A) denied the deduction.

3. Addition of Interest Income to Capital Work in Progress:
The assessee alternatively requested that if the interest income is taxed under "Income from other sources" and the deduction of interest payment is not allowed, then the interest income should be added to the capital work in progress. The ITAT, following the precedent set in the Hazaribag Ranchi Expressway Ltd. case, directed that the interest earned from short-term fixed deposits should be considered as part of business receipts and reduced from the capital work in progress during the project implementation period.

4. Liability for Payment of Interest Under Section 234B:
The assessee contested the liability for interest payment under section 234B. However, this issue was not elaborated upon in the judgment, and the primary focus remained on the taxability of the interest income and the deduction of interest payments.

Conclusion:
The ITAT ruled in favor of the assessee, directing the AO to treat the interest income from short-term fixed deposits as business income and reduce it from the capital work in progress during the project implementation period. The appeal filed by the assessee was allowed.

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