2005 (12) TMI 206 - AT - Income Tax

Tax Tribunal: Interest on Foreign Currency Deposits Taxable as Income; Deductions Allowed for Related Expenditure

The Tribunal held that interest earned on foreign currency deposits during the pre-operative period is taxable as 'Income from other sources.' The ... Income From Other Sources Issues Involved:1. Taxability of interest earned on foreign currency deposits during the pre-operative period.2. Taxability of interest earned on short-term investments in public sector bonds.3. Allowability of deduction for expenditure incurred to earn interest income.Detailed Analysis:1. Taxability of Interest Earned on Foreign Currency Deposits During the Pre-Operative Period:The primary issue was whether the interest earned on foreign currency deposits during the pre-operative period should be taxed as 'Income from other sources' or allowed to be set off against pre-operative expenses. The Assessing Officer included the interest income of Rs. 25,17,666 as taxable under 'Income from other sources.' However, the CIT(A) deleted this addition, considering the interest as a capital receipt incidental to the setting up of the project, thereby allowing it to be set off against pre-operative expenses. The CIT(A) noted that the interest earned was due to mandatory requirements and not intentional income generation, referencing Supreme Court decisions in CIT v. Canara Bank and Universal Radiators to support this view.2. Taxability of Interest Earned on Short-Term Investments in Public Sector Bonds:The CIT(A) upheld the taxability of Rs. 2,31,941 earned from short-term investments in public sector bonds, treating it as a revenue receipt. The CIT(A) differentiated this from the foreign currency deposits, stating that the short-term investments were not a business requirement or for setting up the project. This view was supported by the Patna High Court decision in Bokaro Steel Ltd., which treated similar income as not part of the assessee's business.3. Allowability of Deduction for Expenditure Incurred to Earn Interest Income:The assessee argued that if the interest income was taxable, the expenditure incurred to earn this income should be allowed as a deduction. The Tribunal found merit in this contention and directed the Assessing Officer to verify and allow necessary relief for the expenditure incurred to earn the interest income.Tribunal's Conclusion:The Tribunal, referencing the Supreme Court decisions in Tuticorin Alkali Chemicals & Fertilizers Ltd. and Autokast Ltd., held that the interest earned on foreign currency deposits is taxable as 'Income from other sources.' The Tribunal vacated the CIT(A)'s order and restored the Assessing Officer's order. However, it directed the Assessing Officer to verify and allow deductions for the expenditure incurred in earning the interest income.Final Judgment:The Tribunal allowed the Revenue's appeal, emphasizing the taxability of interest income as per the Supreme Court's larger bench decisions, while also ensuring that the expenditure incurred to earn such income should be duly considered and allowed as a deduction.