₹1.92 Cr Short-Term Deposit Interest: ITAT Remands to AO to Verify Capital vs. Revenue Treatment [Read Order]

The Jabalpur bench of Income Tax Appellate Tribunal (ITAT) remanded the matter relating to short-term deposit to the Assessing Officer to determine the correct tax treatment of ₹1.92 crore earned as interest on the deposits.

The assessee, M/s RPJ Minerals Private Limited, is engaged in the development of mining of minerals such as dolomite, limestone, fluorite, china clay, alumina, graphite, gypsum, bauxite, silica, granite, orine ore, kynite and other types of minerals. It filed its return declaring a total loss of Rs. 8,95,787/-.

The assessment was completed on a total income of Rs. 3,37,43,820/-. During the course of assessment proceedings, the Assessing Officer observed that the assessee received an interest on FDRs aggregating to Rs. 3,14,93,816/-, but had not offered the same as income from other sources.

Rather, the assessee had adjusted the same in its capital work in progress as capital receipts. During the course of assessment proceedings, it was explained to the ld. AO that the assesse earned this interest amount by temporarily placing a part of borrowed funds in a short-term deposit with a scheduled bank, but these deposits continued to form part of the funds that were required for the implementation of the project, and there were no spare or surplus funds.

It was submitted that the purpose of making the short-term deposits was to make efficient use of the project capital and thereby reduce the cost of the project to the extent possible. It was not an attempt to take funds out of the project and create an independent source of income.

Since the funds deployed in short-term deposits continued to be inextricably linked with the mining development project, therefore, the interest received on these deposits were treated as capital receipts going to reduce the cost of the project, and therefore, it was credited to the pre-operative expenditure of the capital work in Progress.

However, the AO, concluded that the interest earned by the assessee prior to the commencement of business on short term deposits with bank out of term loans secured from financial institutions was income chargeable under the head, “income from other sources” and would not go to reduce the interest payable by the assessee, which would be capitalized after the commencement of commercial production. Thus, the amount of Rs.. 3,14,93,816/- was added back as income from other sources.

Aggrieved with this decision of the ld. AO, the assessee went in appeal before the ld. CIT(A). Thus, the ld. CIT(A) considered judgments and concluded that the case of the assessee was completely covered by the judgment of the Hon’ble Delhi High Court in the case of CIT vs. Facor Power Limited (supra) and therefore, a sum of Rs. 3,14,93,816/- is on the capital account and could not be assessed under the head, “income from other sources”. Accordingly, the addition made by the AO was deleted.

The tribunal relied upon various decisions of the Supreme Court and High Court to resolve the matter under consideration.

The tribunal quoted the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT, in which the Court held that in the usual course, interest received by the assessee from bank deposits and loans would be taxable as income under the head “income from other sources” under section 56 of the Income Tax Act.

The Court held that if a company had not commenced business, there cannot be any question of assessment of its profits and gains of business, but that did not mean that its income from other sources would not be taxed. In that case, the company had chosen not to keep its surplus idle but had decided to invest it fruitfully.

The Tribunal further quoted the Delhi High Court thereafter considered this issue in the case of Indian Oil Panipat Power Consortium vs. ITO . In this case the Court was of the opinion that the investment made by the assessee was for the purposes of business, therefore and it could not be held that the income derived by parking the funds temporarily with Tokyo Mitsubishi Bank would result in the character of the funds being changed. Since the funds have been infused for the specific purpose of acquiring land and development infrastructure, the interest earned on funds brought in for that purpose could not have been classified as income from other sources.

The Tribunal based on the judgements observed that, if funds have been borrowed for a setting up of the business and are invested in short term deposits for the duration when they are not immediately required, then the income from such short term deposits would have to be assessed under the head, “income from other sources” as laid down by the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT and Bokaro Steel Limited.

If, however, the deposit itself was made for a purpose which was intrinsically linked to the setting up of the business, then in accordance with the Supreme Court in the cases of Bokaro Steel Limited (supra) and Karnal Cooperative Sugar Mills Limited (supra), such an interest would not be assessed under the income from other sources, but should then be taken up according to the ratio laid down in Bokaro Steel Limited i.e. they should be capitalised and reduced from the cost of assets, because such receipts would be of a capital nature and could not be taxed as income.

The Tribunal was of the opinion that from the study of these judgments, the individual facts of the assessee’s case would have to be examined to determine the reason for the short-term deposits.

At various points in time, different submissions have been made by the assessee. At one point in time, it was stated that in order that the funds should not be kept idle, they had to be invested in short-term deposits, so that the capital could be made more productive. If that were the case, then, going by the logic in Tuticorin Alkali Chemicals and Fertilizers Limited vs. CIT (supra), the same should be brought to tax under income from other sources.

However, on other instances, it has also been submitted that the money was deposited in the bank as security for obtaining bank guarantees and also deposited as security with Tiger Hill Resorts for the purposes of mining development and operation. If the short term deposits have been made for these purposes, then, going by the ratio laid down by the Supreme Court in Bokaro Steel Limited and Karnal Cooperative Sugar Mills Limited, the interest derived on such deposits is to be treated as capital receipts and can be used to reduce the cost of capital assets.

Since the determination of the nature of the deposits is important to decide how the interest is required to be treated, within the ratios laid down by the various judgments of the Supreme Court, the two-member bench of Kul Bharat (Vice President) and Nikhil Choudhary (Accountant Member) restored this matter to the file of the AO in both assessment years.

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