Interest Income from Bank FDs earned during Pre-Operative period is Taxable as ‘Income from Other Sources’: ITAT Hyderabad

Interest

The Income Tax Appellate Tribunal (ITAT), Hyderabad bench, in the case of DRS Warehousing (South) v. ITO, held that the interest on FDs earned during the pre-operative period is taxable as ‘Income from Other Sources’ under the provisions of Income Tax Act.

Assessee-company, in the instant case, is involved in developing, maintaining warehouses and godowns etc. During the relevant year, the assessee earned interest income from FDs in Banks. Assessee maintained that the income was earned during pre-operative period when business has not commenced. It was also contended that the said interest was set-off to the borrowed interest. They further urged that such income, being capital in nature, is not taxable.

The Revenue on the other hand, relied on the Apex Court ruling in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd.

Diving deeply into the facts of the case, the bench found that it is clear that assessee, even though has borrowed funds has not utilised them for the purpose of project and has kept them in short term FDs with another bank, not in the bank from which it has obtained loan. “This indicates that the funds are not utilised for the purpose of business in the project construction. Therefore, on facts alone, the set-off cannot be given.”

It was observed that the Apex Court had settled the issue of interest earned on FDs of surplus funds is in a plethora of decisions.

The bench noticed the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd., in which it was held that interest earned during the construction period cannot be set-off to the interest paid on borrowed funds. The Court in the said case has clearly held that the amounts are to be brought to tax under the head ‘Other Sources’.

Dismissing the appeal, the bench said that “thus, there is clear line of demarcation. If the receipts are inextricably connected to the project or construction, then, the amounts are to be set-off to the capital expenditure incurred during the pre-operative stage. The interest on FDs have no connection with the project/construction activity, then the same is to be brought to tax under the head ‘Other Sources’.”

Read the full text of the Order below.

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