The Kerala High Court in a significant case held that the ‘interest income’ on the short-term deposits of the funds infused by the Government, which are sanctioned for purpose of setting up of business, are in nature of ‘capital receipt’ and not ‘revenue receipt’.
HLL Biotech Limited , the appellant company/ assessee, set up by the Ministry of Health & Family Welfare to manufacture and supply vaccines, is a wholly owned subsidiary of HLL Life Care Ltd., a wholly owned Government of India enterprise. Towards setting up of the Integrated Vaccine Complex, the Government of India sanctioned an amount of Rs.285 crores, which were released in tranches. At the same time, the Government 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.
Since the commencement of construction activities proceeded in a phased manner, the assessee parked certain amounts with banks and 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, and was shown as fixed assets. This was accepted by the AO in the assessment.
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However, the PCIT initiated revision proceedings under section 263 and resultantly, the AO passed orders treating the interest received from out of the investments of the equity funds as, “income from other sources”. The appellant approached the High Court challenging the decision of the I-T authorities in holding that the interest received from the short-term deposits cannot be set off against the construction expenditure.
The Bench referred to the decision of Apex Court in Commissioner of Income Tax v. Bokaro Steel Ltd, where it was observed that the receipts which were intrinsically connected with the construction of plant, which went to reduce the cost of construction, were capital receipts and not income of the assessee.
The Division Bench of Justice Sathish Ninan and Justice Johnson John observed that if the funds invested are not surplus funds as such, and the funds and interest accrued thereon are inextricably linked to them setting up of the business, and its use, including the interest income therefrom, is to be exclusively for the setting up of the business, then the ‘interest income’ from such funds would be in nature of capital receipts.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
The High Court concluded that interest earned on funds granted by the government, which were kept in bank till its utilization for setting up of business, are capital receipt and allowed Assessee’s appeals.
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