Interest earned on funds earmarked for capital expenditure is not taxable as income from other sources but should be treated as part of the capital cost.

JUDGMENT :

VIBHU BAKHRU, ACJ. 

INTRODUCTION

1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act) impugning an order dated 06.04.2018 (hereafter the impugned order ) passed by the learned Income Tax Appellant Tribunal [hereafter the Tribunal] in ITA No. 4606/Del/2017 captioned International Coal Ventures Pvt. Ltd. v. Income Tax Officer, New Delhi, whereby the respondent’s appeal under Section 253 of the Act, was allowed.

2. The respondent (hereafter the Assessee) had filed the aforesaid appeal (ITA No.4606/Del/2017) against the decision of the Commissioner of Income Tax (Appeals) [hereafter CIT(A)], whereby the Assessee’s appeal against the assessment order dated 25.03.2015 in respect of the assessment year (AY) 2012-13, was rejected.

3. The controversy involved in the present appeal relates to the addition of Rs. 31,18,900/- made by the Assessing Officer (hereafter the AO) to the declared income of the Assessee. The Assessee had filed its Income Tax Return for the relevant AY 2012-13 declaring its income as NIL. During the course of the assessment proceedings, the AO noticed that the Assessee had earned an amount of Rs. 11,45,92,550/- in respect of the funds received from its promoters. The Assessee had also paid interest to its promoters amounting to Rs. 11,14,73,651/-. According to the AO, the difference between the interest earned and interest paid was chargeable to tax as ‘income from other sources’. Accordingly, the AO passed the assessment order determining the Assessee’s total income at Rs. 31,18,900/-.

4. Aggrieved by the same, the Assessee filed an appeal before the CIT(A) claiming that it was entitled to set off the interest earned against the amounts capitalized as ‘Capital Work-in-Progress’ (CWIP in short). The CIT(A) rejected the said contention holding that the interest was in the nature of ‘revenue receipt’ and not a ‘capital receipt’ and therefore, it was required to be accounted for and taxed accordingly. The CIT(A) concluded that the amount earned on short term deposits was chargeable to tax under the head ‘income from other sources’ in terms of Section 56 of the Act. The CIT(A) was also of the view that the AO had erred in permitting a deduction in respect of amount paid by the Assessee to promoters as interest, for determining the net amount that was chargeable to tax under Section 57(iii) of the Act. The CIT(A) held that a deduction under Section 57(iii) of the Act was not permissible in respect of the interest payable on funds received from the Assessee’s promoters as that expenditure could not be considered as incurred ‘wholly or exclusively’ for the purpose of earning interest income from short term deposits. Accordingly, the CIT(A) determined the Assessee’s taxable income at Rs. 11,58,59,615/-.

5. The Assessee assailed the CIT(A)’s order dated 17.05.2017 before the learned ITAT, which was allowed in terms of the impugned order. The learned ITAT held that the Assessee had received funds from its promoters in furtherance of its business for acquiring a coal mine overseas. Therefore, the Assessee was entitled to set off the interest paid against the interest received and the balance receipt against CWIP. The learned ITAT held that the interest earned from the deposit was not chargeable to tax under the head income from other sources and accordingly, set aside the order of the CIT(A) as well as the AO.

QUESTION OF LAW

6. In the aforesaid backdrop, the Revenue has preferred the present appeal projecting several questions of law. This court considered the same and vide order dated 03.09.2024 admitted the present appeal on the following question of law:-

“Whether in the facts and circumstances of the case and in law the interest income earned on surplus fund deposited in the bank during pre-commencement of the business is liable to be taxed under Section 56 of the RINL, and CIL respectively. Income Tax Act, 1961?”

 THE FACTS

7. The Assessee was incorpora