TaxTMI 
TaxTMI 
2019 (7) TMI 437
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...., the Tribunal was right in not allowing the expenditure for earning interest income? 3) Whether, in law, the Tribunal having held that interest income should be considered as a revenue receipt chargeable to tax, then the Tribunal ought to have consequentially held that the expenditure of Rs. 2,55,75,842 debited to Profit & Loss Account should be allowed as a deduction? and 4) Whether, in law, the Tribunal was right in not appreciating that since the interest is directly related to the manufacturing facility, it should be added to the Capital Work in Progress?" 3. We have heard Mr.SP.Chidambaram, learned counsel appearing for the appellant/assessee and Mr.Karthick Renganathan, learned Senior Standing Counsel assisted by Mr.S.Rajesh, learned counsel for respondent Revenue. 4. The short issue, which is required to be decided in this case, is as to whether the interest earned by the assessee on short term deposits out of equity funds for purchase of assets prior to commencement of business, is a capital receipt or it is taxable as 'Income from Other Sources'. 5. The Assessing Officer found that such interest is taxable under the head 'Income from Other Sources', which finding w....
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....nalization/acquisition of these capital purchases. The assessee stated that the lease arrangement for the land was signed in the last week of May 2011 and the plant and machinery were procured over a period of time and facility was set up. On account of time taken for the transaction, the share capital subscription received, was placed in short term deposits and then withdrawn as and when required by the assessee for capital purchases. 9. The assessee further stated that pending such purchases, the assessee had parked the funds with the banks in the form of fixed deposits for a short term period and deposits were generally placed for 7 days to 60 days and couple of deposits were placed for 120 days and 180 days. Further, the assessee asserted that during the construction period, the assessee did not borrow any funds, but merely used the equity capital. Thus, the stand of the assessee is that the funds which were in Bank in the form of Fixed Deposit for a short term period, were inextricably linked with the process of setting up of the business, the interest income earned from short term deposits from Bank has been treated as capital in nature and to be set-off against the preoper....
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....red to, CIT(A) proceeded solely based on the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers case and held that in the light of said decision there is no infirmity in the order of Assessing Officer. Such order has been challenged before the Income-Tax Appellate Tribunal reiterating the same stand taken before the Assessing Officer and CIT(A). 11. On a reading of the order of the Tribunal, we find that the Tribunal concurred with CIT(A) and extracted substantial portion of the order passed by CIT(A) and held that CIT(A) was right in applying the decision of the Hon'ble Supreme Court in Tuticorin Alkali Chemicals & Fertilizers and held that interest earned by the assessee on the investment of share capital in call deposits before the commencement of its production could be assessed separately under the head 'Other sources'. 12. A Division Bench of this Court in the case of Commissioner of Income-Tax Vs. VGR Foundations reported in [2008] 298 ITR 132 considered the decision in Tuticorin Alkali Chemicals & Fertilizers case and made certain observations with regard to whether share application money will fall in to the category of 'Borrowe....
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....usiness, resulting in earning of interest by he assessee, would amount tot he assessee earning any income. This Court held that if a person borrows money for business purposes, but utilises that money to earn interest, however, temporarily, the interest so generated will be his income. This income can be utilised by the assessee whichever way he likes. Merely because he utilised it to repay the interest on the loan taken will not make the interest income as a capital receipt. The department relied upon the observations made in that judgment (at page 179) to the effect that if the company, even before it commences business, invests surplus funds in its hands for purchase of land or house property and later sells it at profit, the gain made by the company will be assessable under the head 'Capital gains'. Similarly, if a company purchases rented house and gets rent, such rent will be assessable to tax under Section 22 as income from house property. Likewise, the company may have income from other sources. The company may also, as in that case, keep the surplus funds in short-term deposits in order to earn interest. Such interest will be chargeable under Section 56 of the Act.....
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.... [2018] 403 ITR 426 (SC), wherein the Court held as follows: "12. The common rationale that is followed in all these judgment is that if there is any surplus money which is lying idle and it has been deposited in the bank for the purpose of earning interest then it is liable to be taxed as income from other sources but if the income accrued is merely incidental and not the prime purpose of doing the act in question which resulted into accrual of some additional income then the income is not liable to be assessed and is eligible to be claimed as deduction. Putting the above rationale in terms of the present case, if the share application money that is received is deposited in the bank in light of the statutory mandatory requirement then the accrued interest is not liable to be taxed and is eligible for deduction against the public issue expenses. The issue of share relates to capital structure of the company and hence expenses incurred in connection with the issue of shares relates to capital structure of the company and hence expenses incurred in connection with the issue of shares are to be capitalized because the purpose of such deposit is not to make some additional income but....