Court rules that interest earned on funds linked to business setup is a capital receipt, aligning with the Supreme Court's Bokaro Steel Ltd. judgment.
In a significant ruling, the Delhi High Court has set aside a decision by the Income Tax Appellate Tribunal (ITAT), determining that the interest income earned by VNG Automotive P. Ltd. on funds deposited in a bank, which were inextricably linked to the setting up of its business, cannot be taxed as "income from other sources." Instead, this interest should be considered a capital receipt, effectively reducing the cost of the project.
The case revolves around VNG Automotive P. Ltd., which was incorporated to manufacture and export ecological brake-shoes. The company had filed returns declaring "nil" income for the assessment years 1993-94 and 1994-95, adjusting the interest earned on temporarily deposited funds against project expenses. The Assessing Officer (AO) reopened the assessment, classifying the interest as taxable income based on the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd.
The Commissioner of Income-tax (Appeals) [CIT(A)] had initially ruled in favor of VNG Automotive, but the ITAT reversed this decision, leading to the current appeal. The High Court, while analyzing the case, agreed with VNG Automotive's argument that the ITAT had overstepped by addressing jurisdictional issues not contested by the Revenue and misapplying the precedent set by the Tuticorin Alkali case.
The court emphasized that the funds in question were not surplus but intended for specific project-related obligations, thus fitting the criteria established in the Supreme Court's Bokaro Steel Ltd. case. The court noted that the interest earned was directly linked to the process of setting up the plant and should be treated as a capital receipt, not taxable income.
This decision underscores the importance of distinguishing between income generated from surplus funds and that which is intrinsically linked to business setup, impacting how companies account for interest income during pre-operative phases.
Bottom Line:
Income Tax Law - Interest earned on funds inextricably linked with setting up of a business is not taxable as income from other sources and can be adjusted against pre-operative expenses.
Statutory provision(s):
Income Tax Act, 1961 Sections 35D, 56, 143, 148, 254
