Interest on funds inextricably linked to project setup is a capital receipt, not taxable income.

The appellant company was incorporated in 1992 to manufacture and export brake-shoes

For the Assessment Years (AY) 1993-94 and 1994-95, it filed returns declaring "nil" income, adjusting interest earned on bank deposits against pre-operative project expenses

The company had raised loans from directors to pay for technical know-how (agreement with CDB Holding Pte. Ltd), land, and machinery

Funds not immediately required for these committed liabilities were deposited in banks, earning interest of Rs. 1,33,151 and Rs. 2,37,770 respectively

The Assessing Officer (AO) reopened the assessments under Section 148 of the Income Tax Act, 1961, treating the interest as "income from other sources" based on the Supreme Court’s ruling in Tuticorin Alkali Chemicals

While the Commissioner of Income-tax (Appeals) [CIT(A)] ruled in favor of the assessee, the Income Tax Appellate Tribunal (ITAT) reversed this, holding the interest taxable.

1. Whether the ITAT was right in law in upholding the reassessment despite the Revenue not challenging the CIT(A)’s finding that jurisdiction was assumed on a mere change of opinion.

2. Whether the interest earned on deposits made from funds earmarked for project obligations (land, machinery, technical fees) constitutes a capital receipt inextricably linked to the setting up of the plant or taxable income from other sources.

The Court applied Section 147 and 148 regarding reassessment, noting that an intimation under Section 143(1) does not constitute an "opinion," thus precluding the "change of opinion" bar as established in ACIT v. Rajesh Jhaveri Stock Brokers Pvt Ltd

Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest on idle surplus funds is taxable income

CIT v. Bokaro Steel Ltd., which established that receipts "inextricably linked" to the setting up of a plant are capital receipts that reduce the cost of the project

This "inextricable link" test was further supported by CIT v. Karnal Cooperative Sugar Mills Ltd. and Indian Oil Panipat Power Consortium Ltd. v. ITO.

Regarding the ITAT's powers, the Court relied on Mahalakshmi Textile Mills Ltd. to affirm the Tribunal's broad jurisdiction to decide issues relating to the assessment

On the first issue, the Court held that since the original assessment was completed via intimation under Section 143(1) and not a scrutiny order under Section 143(3), the AO had never formed a formal opinion; therefore, the reassessment based on the Tuticorin judgment was validly initiated

It further clarified that the ITAT has the power to address jurisdictional issues even if not specifically raised in the Revenue’s grounds, provided they pertain to the subject matter of the appeal

On the second issue, the Court observed that the funds were not "idle surplus" but were loans from directors specifically earmarked for committed liabilities, including annual installments for technical know-how and payments for land and machinery

The Court found that the interest was earned while awaiting the deployment of these project-specific funds

Consequently, the Court determined that the interest was "inextricably linked" to the setting up of the business, aligning the case with the Bokaro Steel doctrine rather than the Tuticorin rule

However, it answered the second question in favor of the Appellant/Assessee, holding that the interest was a capital receipt to be set off against pre-operative expenses and not taxable as "income from other sources"

The High Court set aside the ITAT’s order and allowed the appeals