Interest earned during construction period

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Ranga Rao (Querist)
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21 May 2009 Hi Friends,

the company is under construction and it has earned interest income from FDRs (fixed deposits receipt). company did not have any borrowed funds. the FDs are cerated from the paid up capital and share application money and also the company has given bank guarantees to outsiders, those guarantee money is transferred to FD on which also the interest is earned.

i) whether this interest income earned during construction period is taxable?
ii) can the company set off this interest income against PRE-OPERATIVE expenses?
iii) can the company claim the TDS refund from the department, if not taxable?

Thanks in advance.

taxindiaconnect

taxindiaconnect (Expert)
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21 May 2009

Any interest earned during the construction period is taxable in the hands of the assessee and it can not be set off against the preoperative expenditure. This is a well settled position as decided by Supreme Court Of India in the case of TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD vs CIT 227 ITR 172. In this case The assessee deposited part of the borrowed funds on term-deposits. Following question was raised by ITAT for the consideration of the Apex Court
"Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after the commencement of commercial production ?"
While deciding on the above matter, the Hon;ble Court has uphold the order of the ITAT in which the ITAT has ruled that the principles of accountancy was not always good law. The interest earned was income from other sources. It could not set off against interest payable. While deciding the matter The Hon’ble Court has considered decision of various courts on the issue. You can visit my blog for the details of the case laws.

The third query is answered accordingly.