Interest Earned On Funds Granted By Government, Kept In Bank Till Its Utilization Is Capital Receipt: Kerala HC
The Kerala High Court 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'. The Division Bench of Justice Sathish Ninan and Justice Johnson John observed that “if the funds invested are not surplus funds as such,...
The Kerala High Court 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'.
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, then the 'interest income' from such funds would be in the nature of capital receipts”.
Facts of the case:
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.
The appellant commenced the construction works for setting up of the project but sought for additional funding. Since the 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.
However, the PCIT initiated revision proceedings u/s 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”. Hence, 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.
Observations of the High Court:
The Bench referred to the decision of Apex Court in Commissioner of Income Tax v. Bokaro Steel Ltd [(1999) 236 ITR 315 (SC)], 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 Bench also referred to the decision in case of Principal Commissioner of Income Tax v. FACOR Power Ltd [(2016) 283 CTR (Del) 141], where it was observed that interest income on fixed deposit receipts placed with the Bank as margin money for procurement of various capital goods for setting up of the power project, were inextricably linked with the setting up of the power plant, and hence, in the nature of a capital receipt and not revenue receipt.
Thus, the Bench found 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.
The Bench found that the setting up of the project was not over and is in the process, and hence, the funds disbursed and utilised are stage-wise.
Thus, the Bench observed that 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.
The funds, with the income derived therefrom are to be used exclusively for the setting of the project, as per the stipulation of the government, added the Bench.
Hence, 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.
Finally, the High Court allowed Assessee's appeals.
Counsel for Petitioner/ Assessee: M.Gopikrishnan Nambiar, K.John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C. Abraham and S.Parvathi
Counsel for Respondent/ Revenue: Aayakar Bhavan
Case Title: HLL Biotech Limited versus The Commissioner of Income Tax
Case Number: ITA NO. 241 OF 2019
Citation: 2024 LiveLaw (Ker) 616