Interest on Fixed Deposits on Money Received in respect of Share Capital is not Assessable as ‘Other Income’: ITAT [Read Order]

ITAT Swapping Shares - hare Capital - Shareholders

In the Case, Assistant Commissioner of Income Tax vs. M/s Posco India Private Limited, Cuttack bench of Income Tax Appellate Tribunal (ITAT) recently held that interest on fixed deposits on money received in respect of share capital cannot be assessed as other income.

Assessee Company in the instant case M/s Posco India Pvt Ltd has filed its return of income for the relevant assessment year. During the course of assessment proceedings, the Assessing Officer (AO) observed that the Assessee has earned an interest income of Rs.1,73,30,736 in the year 2010-2011 and Rs.13,64,57,044 during the year 2012-2013 on fixed deposits utilizing a part of unutilized capital and interest income was claimed to be exempt as capital receipt.

The AO further observed that the inextricable link with the process of setting up the project with deposits in banks has not been explained by the assessee and accordingly he taxed the interest income under section 56 of the Income Tax Act 1961 under the head income from other sources.

On appeal, CIT(A) granted relief to the Assessee by holding the fact that CIT(A) has also deleted the addition on account of interest on FDs following the order of the Tribunal in the preceding assessment years. Aggrieved by the order of the authority Revenue approached the Tribunal on appeal.

Before the Tribunal bench counsel for the Assessee advocate B.K.Mohapatra submitted that the Assessee Company has been following the system of offering interest on Fixed Deposits on the amount received in the share capital and the same was deposited with the bank and the nature of transaction is of commercial expediency whereas the AO treated the said income under the head income from other sources and also made addition by applying the judicial decisions.

After considering the rival submissions of both parties, the Tribunal bench comprising of Judicial Member Pavan Kumar Gadale and Accountant Member N.S Saini observed that the sole issue in the present case is whether the interest income earned on fixed deposits on the money received in respect of share capital is taxed as other income or not. While analyzing the available material facts on records the division bench observed that “the funds in the form of share capital were infused for a specific purpose of acquiring properties for the new project. Therefore, the interest earned on funds primarily brought for infusion in the business could not have been classified as income from other sources since the income was earned in a period prior to the commencement of business, and it was in the nature of capital receipt”.

The bench further observed that “an income received by the Assessee can be taxed under the head ‘income from other sources’ only if it does not fall under any other head of income as provided in section 14 of the Act”. But the present issue does not fall within the meaning of the said section.

While concluding the issue the bench further held that interest on fixed deposits are not taxable under income from other sources and, accordingly, uphold the findings of the CIT (A) and dismissed the appeal filed by the Revenue.

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