Interest on temporary investment of borrowed funds treated as income from other sources, not capitalised against construction cost.

Issue concerns tax characterisation of interest earned on temporary investment of borrowed funds intended for real estate construction. Applying the statutory heads and set-off framework, and following binding precedent, the interest was held to be revenue in nature and taxable under the head Income from Other Sources rather than capitalisable against project cost; decisions cited by the taxpayer were distinguished as factually different and insufficient to displace the controlling precedent, resulting in an adverse outcome for the assessee on the tax treatment of such receipts.

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Issues: Whether interest earned on temporary investment of borrowed funds intended for construction of a real estate project is to be treated as capital receipt (adjusted against cost of construction) or taxable as income under the head "Income from Other Sources".

Analysis: Facts show borrowed funds for construction were temporarily placed in fixed deposits and interest earned was credited to construction cost account. Relevant statutory provisions include Section 56, Section 57, Section 70 and Section 71 of the Income-tax Act, 1961 dealing with heads of income and set-off rules. Earlier decisions of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. addressed identical facts and concluded that interest earned on borrowed funds invested in short-term deposits pending use is assessable as income under the head "Income from Other Sources" and cannot be set off against interest payable or capitalised prior to commencement of business. Distinguishing decisions cited by the assessee (including Bokaro Steel Ltd.) do not overrule or displace the Supreme Court's ruling in Tuticorin and are factually different. The Tribunal followed the binding Supreme Court precedent and applied the statutory framework to hold that the receipt is revenue in nature.

Conclusion: Interest on temporary investment of borrowed funds is taxable as income from other sources and not to be capitalised; decision adverse to the assessee (in favour of Revenue).

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