2024 (4) TMI 923 - AT - Income Tax

Tribunal Upholds Decision: Interest Income on FDs Treated as Capital Receipts for AY 2015-16 Due to Non-Commencement of Business.

The Tribunal dismissed the Department's appeal, affirming the CIT(A)'s decision to treat interest income on FDs as capital receipts for AY 2015-16. The ... Nature of receipts - interest earned on FDs during the year was prior to commencement of business of the assessee-company - Objection of the Department is that the assessee had not shown any nexus between the funds borrowed and the specific investment made by it, is not found relevant as such nexus has to be examined in the year in which the investments were made for the first time - HELD THAT:- In the present case, the investments were made in the earlier years that is continuing in the current year and the assessee-company is deriving interest income on the Fixed Deposits made by it in the earlier years. Respectfully following the decision of the Co-ordinate Bench in the AYs 2013-14 & 2014-15 [2020 (3) TMI 1194 - ITAT AHMEDABAD] we hold that the interest income earned on Fixed Deposits pertaining to the prior period commencement of business was in the nature of “capital receipt”. As held in that year the preoperative expenses of the assessee has to be adjusted with this “capital receipt” and only the balance expense, if any, need to be amortized as per provisions of Section 35D of the Act. Accordingly, the CIT(A) had rightly allowed the claim of the assessee. Appeal filed by the Department is dismissed. Issues Involved:The appeal filed by the Department against the order dated 16/06/2023 passed by the Commissioner of Income-tax (Appeals)-12, Ahmedabad for Assessment Year (AY) 2015-16.Issue 1: Treatment of Interest IncomeThe Department appealed against the order allowing the claim of interest income of Rs. 3,40,38,900/- as capital receipts, contending it should be assessed under 'income from other sources'. They argued that the interest income from Fixed Deposits (FDs) should not be considered capital receipts, citing the Supreme Court case of CIT Vs. Autokast Ltd. The Department also highlighted that the assessee declared the interest income as taxable in the return of income.Judgment:The Tribunal noted that a similar issue was decided in favor of the assessee for AYs 2013-14 & 2014-15, where interest income on FDs pertaining to the period before the commencement of business was treated as a capital receipt. As the business activities had not commenced in the relevant year, the interest earned on FDs was considered a capital receipt. The Tribunal held that the nexus between funds borrowed and specific investments made by the assessee was not relevant in this case, as the investments were made in earlier years. Therefore, the interest income earned on FDs before the commencement of business was treated as a capital receipt, and the claim of the assessee was upheld.Issue 2: Compliance with ITAT OrderThe Department argued that the CIT(A) erred in following the ITAT order without considering that the assessee did not establish a nexus between borrowed funds and specific investments, treating it as surplus funds.Judgment:The Tribunal found that the ITAT had previously decided in favor of the assessee for AYs 2013-14 & 2014-15 regarding the treatment of interest income on FDs as capital receipts. As the business activities had not started in the relevant year, the interest earned on FDs was considered a capital receipt. The Tribunal upheld the CIT(A)'s decision based on the earlier ITAT order and dismissed the Department's appeal.In conclusion, the Tribunal dismissed the Department's appeal, upholding the CIT(A)'s decision regarding the treatment of interest income as capital receipts based on the precedent set in previous cases.