IMPORTANT POINT
Interest income from government funds for project establishment is a capital receipt, not taxable as income from other sources, when inextricably linked to the project.

JUDGMENT :

Sathish Ninan, J.

The common substantial question of law that arises for determination in these appeals is,

“Whether the interest income earned by the assessee from the funds received from the Government of India for setting up of the Company, taxable as ‘income from other sources’”.

These appeals are by the assessee, challenging the orders of the Appellate Tribunal answering the said question in the affirmative.

2. The appellant Company is set up by the Ministry of Health and Family Welfare to manufacture and supply vaccines. It is a 100% subsidiary Company of M/s HLL Life Care Ltd., a wholly owned Government of India enterprise.

3. Towards setting up of the Integrated Vaccine Complex, the Government of India sanctioned a total amount of Rs. 285 Crores. The amount was to be released in tranches. As evidenced by Annexures A, B, C and D, Rs. 28 crores, Rs. 150 crores, Rs. 40 crores and Rs. 56.88 crores were released by the Government on 28.02.2012, 25.09.2012, 18.03.2015 and 19.08.2015 respectively. The balance amount of Rs. 10.12 crores was invested towards 100 acres of land provided for setting up of the unit.

4. As per Annexure-E letter dated 14.06.2018, the Government of India clarified that the funds and the income earned out of the funds are to be utilized only for the purpose of setting up/establishing the project and not for any other purpose.

5. Though the construction works for setting up of the project commenced during the assessment year 2013-14 (Financial Year 2012-13) for completing the project in four years, it did not work out as planned. The assessee has sought the support of the Government of India for meeting the cost escalation, through additional funding.

6. Since the construction activities proceeded in a phased manner, the assessee had parked certain amounts which were not immediately required for construction, in Banks and in the holding Company. The assessee received interest from such short-term deposits. The interest income was set off against the expenditure incurred for the construction of the Integrated Vaccine Complex. In the audited financial statement it was shown under the head, fixed assets.

7. Though the assessing authority as per Annexure-F assessment orders in the writ petitions, had accepted the return of income submitted by the assessee for the different periods covered therein, the Principal Commissioner of Income Tax initiated revision proceedings under Section 263 of the Income Tax Act and ordered the assessing authority to pass fresh orders, taking into consideration the assessability of interest income, in the light of the judgment of the Apex Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income Tax, (1997) 227 ITR 172 (SC).

8. Thereafter the assessing authority passed Annexure-H orders in ITA No.241/2019, treating the interest received from out of the investments of the equity funds as, “income from other sources”.

9. The orders of the assessing authority were affirmed in appeals, by the Commissioner of Income Tax (Appeals) as per Annexure-I order in ITA No.241/2019. The assessee was also unsuccessful in its further appeals before the Income Tax Appellate Tribunal. The orders dismissing the appeals is Annexure-L (common order) in all the IT Appeals. The authorities held that the interest received from the short- term deposits are to be treated as income from other sources and it cannot be set off against the construction expenditure. It is challenging the same, that these appeals have been preferred by the assessee.

10. We have heard Sri.Kuryan Thomas, the learned counsel for the appellant and Sri.Christopher Abraham, the learned standing counsel for the respondent on the substantial question of law.

11. The learned counsel for the appellant would contend that, the interest income received from the deposits is only in the nature of a capital receipt. The fund and the interest income therefrom are integrally connected with the setting up of the project. The