Interest Earned on Short-Term Deposits of Funds Received From Govt. Funds is Capital Receipt | HC

Case Details: HLL BIOTECH Ltd. vs. Commissioner of Income-tax - [2024] 167 taxmann.com 537 (Kerala)[25-09-2024]

Judiciary and Counsel Details

• Sathish Ninan & Johnson John, JJ.
• M Gopikrishnan Nambiar, K. John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C. Abraham & Smt. S. Parvathi Advs. for the Appellant.

Facts of the Case

The assessee company was set up by the Ministry of Health and Family Welfare and was a wholly owned subsidiary of a Government enterprise. The Government of India sanctioned a certain amount to the assessee for setting up the Integrated Vaccine Complex, which was to be released in tranches.

Subsequently, the construction activities proceeded in a phased manner, and the assessee parked certain amounts, which were not immediately required for construction, in banks and in the holding company. The assessee earned interest from such short-term deposits, which were set off against the expenditure incurred for constructing the Integrated Vaccine Complex.

However, during the assessment proceedings, the Assessing Officer (AO) treated such interest as received from the investments and taxed under the head of “Income from Other Sources”.

On appeal, CIT(A) and the Tribunal confirmed the AO’s order. The aggrieved assessee filed an appeal before the Kerala High Court.

High Court Held

The High Court held that if the funds invested were not surplus funds as such, and the funds and interest accrued thereon are inextricably linked to the setting up of the business and its use, including the interest income therefrom, then the ”interest income” from such funds would be in the nature of capital receipts.

In the instant case, it was of great significance to consider the nature of the amount received by the assessee from the Government of India and the purpose of its use. It was categorically mandated that the funds and income earned from the funds provided by the Government shall be used only for the purpose for which they were released. It was also clarified that any interest income from the said funds, as a consequence of bank deposits, shall also be used only for the purpose of the project.

Therefore, it was evident that the deposits and the income were inextricably linked with the setting up of the project. It was not in dispute that the setting up of the project was not over and was still in progress. The funds disbursed and utilised were stage-wise, and the portion of the funds kept in short-term deposits could not be termed as ”surplus amounts,” which could be utilised as per the wish and will of the company.

Accordingly, the funds and the income derived therefrom were to be used exclusively for the setting of the project.

List of Cases Reviewed

• Order of ITAT, Cochin in IT Appeal No. 576 of 2018, dated 19-03-2019 (para 21) reversed.
• Principal Commissioner of Income Tax v. FACOR Power Ltd. [2016] 283 CTR (Del) 141;
• Roads & Bridges Development Corporation of Kerala Ltd. v. Assistant Commissioner of Income Tax [2018] 257 Taxman 392 (Ker.)
• Commissioner of Income Tax v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC) (para 18) followed.
• Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income Tax [1997] 227 ITR 172 (SC) (para 15) distinguished.

List of Cases Referred to

• Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 93 Taxman 502/227 ITR 172 (SC) (para 7),
• CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94/236 ITR 315 (SC) (para 15),
• Roads & Bridges Development Corporation of Kerala Ltd. v. Asstt. CIT [2018] 96 taxmann.com 330/257 Taxman 392 (Kerala) (para 16)
• Indian Oil Panipat Power Consortium Ltd. v. ITO [2009] 181 Taxman 249/315 ITR 255 (Delhi) (para 17).