INCOME TAX ACT, 1961

Section4

Income - Capital or revenue receipt - Interest earned on short-term deposits - All lower authorities proceeded on legal principle without an indepth study on facts situation

The issue, which was required to be decided in this case, was as to whether the interest earned by the assessee on short-term deposits out of equity funds for purchase of assets prior to commencement of business, was a capital receipt or it was taxable as 'Income from Other Sources'. AO found that such interest was taxable under the head 'Income from other sources', which finding was confirmed by the CIT(A), and furher affirmed by the Tribunal. Held: Authorities below and the Tribunal, proceeded on the legal principle without making an in-depth study on the facts situation. The settled legal principle is that the law has to be applied to the facts of the given case and not in the reverse. Such an exercise had not been undertaken by the AO at the first instance, as a result of which the matter was proceeded solely based upon the interpretation of the law laid down by the Supreme Court in various decisions. The court was of the firm view that the fact situation was required to be considered and the AO had to then apply legal principle laid down in various decisions and come to a conclusion. Such an exercise had not been done in this case. It was further stated that the assessee received funds from its shareholders as investment in share capital. Share capital subscription received, was placed in short-term deposits and then withdrawn as and when required by the assessee for capital purchases. Assessee further stated that pending such purchases, the assessee had parked the funds with the banks in the form of fixed deposits for a short-term period. Thus, the stand of the assessee was that the funds which were in Bank in the form of Fixed Deposit for a short term period, were inextricably linked with the process of setting up of the business, the interest income earned from short-term deposits from Bank had been treated as capital in nature and to be set-off against the preoperative expenses. One common thread which passes through all the above decisions was that the authorities and the Tribunal had made a fact finding exercise to ascertain as to whether there was an inextricable link with the setting up the business. In the instant case, the AO did not examine such aspect though the assessee had specifically stated in the written submissions. The matter shall be considered afresh by the AO steering clear of the factual position, record his finding on facts and then apply the legal principle. For the above reasons, the appeal filed by the assessee was allowed and the order of the Tribunal was set aside and the matter was remitted back to the AO for a fresh consideration.

Relied:CIT v. VGR Foundations reported in (2008) 298 ITR 132 (Mad) : 2008 TaxPub(DT) 743 (Mad-HC), CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) : 1999 TaxPub(DT) 1094 (SC),CIT v. Shree Rama Multi Tech Ltd. (2018) 403 ITR 426 (SC) : 2018 TaxPub(DT) 1989 (SC) and Indian Oil Panipat Power Consortium Ltd. v. ITO (2009) 181 Taxman 249 (Del) : 2009 TaxPub(DT) 1494 (Del-HC).

REFERRED : Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 93 Taxman 502 (SC) : 1997 TaxPub(DT) 1304 (SC).

FAVOUR : In assessee's favour.

A.Y. : 2012-13

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