Hyderabad bench of Income Tax Appellate Tribunal recently held that interest income earned from deposits of share capital as fixed deposits in bank should be considered as capital receipt which is not taxable under the provisions of the Income Tax Act, 1961.
Assessee in the instant case, is a company established for the purpose of power generation has filed its return of income admitting a loss of Rs. 3, 71,359.
During the course of assessment proceedings the Assessing Officer (AO) observed that the assessee company received huge amount of share capital nearly 50 crores including share premium and a large part of the capital was contributed by the friends and relatives who are NRIs. The funds received in the form of share capital and share premium was kept in fixed deposits in the bank by the assessee and accordingly the assessee received a huge amount as interest from the deposit and the said interest had been set off against the capital expenditure.
The AO further noted that when the interest income earned out of the fixed deposits was offered by the assessee, it has changed the treatment of interest receipt and reduced the capital expenditure. Hence, the AO asked the assessee to explain the same.
The assesse contended that during the year assessee obtained legal opinion about the taxability of interest and according to the opinion it need not offer the interest as ‘income from other sources’ and the same can be set off against the capital expenditure incurred by the assessee. Therefor the company had set off the interest earned on fixed deposits against the capital expenditure and did not offer any income out of interest earned.
After considering the submissions of both parties the division bench comprising of Vice President D.Manmohan and Accountant Member S.Rifaur Rahman observed that in the present case the assessee brought share capital for the purpose of implementation of the particular project. And the share capital was temporarily deposited in its bank account. Hence the interest income earned from the said deposit can be treated as capital receipt because the share capital brought by the assessee only for the commencement of the power project. Since, it could not proceed with the implementation, under constraint, it kept the unutilized funds in the bank.
The tribunal bench further said that the funds kept in bank under constraint and the funds are inextricably linked to the project, such income can be treated as capital receipt. Therefor the assessee is eligible to the assessee is eligible to treat the interest as capital receipt. Whether the assessee can utilize this receipt to set off the other pre-implementation expenses and the assessee can setoff such expenses.
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