Interest income earned from surplus funds prior to business commencement is taxable unless it is directly linked to capital projects as capital receipts.

JUDGMENT :

BHARGAV D. KARIA, J.

1. Heard learned Senior Standing Counsel Ms. Maithili Mehta for the appellant and learned Senior Advocate Mr. Saurabh Soparkar with learned advocates Mr. B.S. Soparkar and Mr. Manya Anjaria for the respondent.

2. These appeals are preferred by the appellant Revenue under Section 260A of the Income Tax Act, 1961 (For Short “the Act”).

3. Tax Appeal No. 160 of 2016 is arising out of the judgment and order dated 27.07.2015 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench ‘B’, Ahmedabad (For short “the Tribunal”) in ITA No. 2755/Ahd/2011 for the Assessment Year 2008-09.

3.1. Tax Appeal No. 160 of 2016 is admitted vide order dated 16.06.2016 for consideration on following substantial question of law:

“Whether the Income Tax Appellate Tribunal has erred in deleting the interest income of Rs.9,31,33,148/- earned by the assessee before commencement of business?”

4. Tax Appeal No. 416 of 2019 and Tax Appeal No. 417 of 2019 are arising out of the judgment and order dated 18.01.2019 passed by the Tribunal in ITA No. 1430/Ahd/2015 and Cross Objection (CO) No. 114/Ahd/2015 for Assessment Year 2011-12.

4.1. Tax Appeal No. 416 of 2019 is admitted vide order dated 16.07.2019 for consideration on the following substantial question of law :

“Whether the Appellate Tribunal has erred in law and on facts in deleting the interest income of Rs.1,45,50,007/- earned by the assessee before commencement of business?”

4.2. Tax Appeal No. 417 of 2019 is admitted vide order dated 16.07.2019 for consideration on the following substantial question of law :

“Whether the Appellate Tribunal has erred in law and on facts in deleting the interest income of Rs.2,23,06,911/- earned by the assessee before commencement of business?”

5. The brief facts of the case for Assessment Year 2009-10 giving rise to these appeals can be summarized as under :-

5.1. The respondent assessee is a limited Company engaged in business of developing, operating, maintenance of power projects and sale of power. During the years under consideration, the power projects of the respondent assessee were under implementation and therefore did not start any commercial activities. Therefore, no Profit and Loss Account for the year under consideration was prepared and the expenditure incurred during the construction period was shown in the balance sheet as the Project Development Expenditure and Capital Work in Progress. The balance sheet as on 31.03.2008 shows the total Project Development Expenditure at Rs.178.56 crores as reflected in Schedule VI of respondent assesses balance sheet. The respondent assessee carried forward a sum of Rs.162.45 crores after setting off Rs.16.11 crore from the total Project Development Expenditure in the balance sheet as Project Development Expenditure. The Income of Rs.16.11 crore included interest income of Rs.11,66,14,614/- and interest income upto 31.03.2007 of Rs.2,34,81,466/-. Therefore, the interest income pertaining to the accounting year 2008-09, relevant to Assessment Year 2009-10 under consideration was Rs.9,31,33,148/- (Rs.11,66,14,614 – Rs.2,34,81,466/-).

5.2. In the return of income the respondent assessee offered the income of Rs.7,91,51,306/- as under :-

Interest income offered to Tax

5.3. The respondent assessee claimed the interest income of Rs.1,39,81,841/- ( Rs.9,31,33,148 – Rs.79,151,306) to be capital receipts not liable t