Interest Earned On Funds Temporarily Parked Pending Project Deployment Cannot Be Taxed As 'Income From Other Sources': Delhi High Court

"The funds are inextricably linked to the setting up of the business of the assessee, and as such, would be covered by the judgment of the Supreme Court in Bokaro Steel Ltd, and not Tuticorin Alkali Chemicals." Delhi High Court, in a significant ruling dated April 10, 2026, held that interest earned on funds temporarily deposited in banks pending their deployment for setting up a business cannot be taxed as 'income from other sources'.

A bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that such funds are inextricably linked to the project and must go toward reducing pre-operative expenses under Section 35D of the Income Tax Act, 1961.

The dispute arose when VNG Automotive P. Ltd. temporarily deposited unutilised loan funds, which were meant for purchasing machinery and technical know-how, into a bank account during its pre-commencement period. The Assessing Officer reopened the assessment and taxed the accrued interest as 'income from other sources'. While the Commissioner of Income-tax (Appeals) ruled in favour of the company, the Income Tax Appellate Tribunal reversed this decision, prompting the company to approach the High Court.

The primary question before the court was whether interest earned on bank deposits during a pre-operative period constitutes taxable income from other sources or a capital receipt to be set off against project expenses. The court was also called upon to determine whether reassessment proceedings under Section 148 of the Act following an intimation under Section 143(1) amounted to an invalid change of opinion. A further issue was whether the ITAT could adjudicate jurisdictional issues not explicitly challenged by the Revenue in its memorandum of appeal.

Funds Inextricably Linked To Project Not Surplus

The High Court distinguished the present facts from the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT. The bench noted that the company had not parked surplus, idle money to generate independent interest. Instead, the funds were explicitly earmarked to facilitate the balance payment for plant, machinery, and technical know-how for which advance commitments had already been made.

Application Of Bokaro Steel Ratio

Applying the Supreme Court's mandate in CIT v. Bokaro Steel Ltd., the bench clarified that receipts intrinsically connected to the construction or setting up of a plant are capital in nature. The judges emphasised that the determining test is not whether the company was under a statutory compulsion to deposit the money, but whether the funds bore a direct and inextricable nexus with the project. Therefore, the court held that the interest earned must enure to the benefit of the assessee.

Intimation Under Section 143(1) Is Not An Assessment Order

Addressing the validity of the reassessment under Sections 147 and 148 of the Income Tax Act, the High Court ruled in favour of the Revenue. The bench observed that an initial processing of a return under Section 143(1)(a) cannot be treated as an assessment order where the Assessing Officer has formed a considered opinion. The court held that the Assessing Officer is not precluded from reopening the assessment if there is reason to believe income has escaped assessment.

No Prohibited Change Of Opinion

Relying on the Supreme Court's decision in Assistant Commissioner of Income-tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd., the court noted that without an order under Section 143(3), reopening the assessment does not constitute a prohibited change of opinion. The bench stated that the initiation of assessment under Section 143(1) merely reflects the acceptance of the return, meaning no formal opinion was previously recorded that could be impermissibly "changed."

"The ITAT possesses ample power to decide any issue that goes to the root of the subject matter before it, as it thinks fit."

Wide Discretionary Powers Of The ITAT

The court also rejected the appellant's argument that the ITAT overstepped its jurisdiction by deciding the validity of the reassessment when the Revenue had not specifically appealed that finding. Interpreting Section 254 of the Act, the bench observed that the ITAT's powers are coextensive with those of the assessing authority. Relying on CIT v. Mahalakshmi Textile Mills Ltd. and Fidelity Business Services India P. Limited v. ACIT, the court affirmed that the Tribunal is not strictly circumscribed by the grounds raised in the appeal memo.

Ultimately, the High Court answered the jurisdictional question regarding reassessment in favour of the Revenue, but ruled in favour of the assessee on the substantive issue of the taxation of interest. The court set aside the order of the ITAT, allowing the appeals and affirming that interest earned on project-linked funds during the pre-commencement phase is a capital receipt that reduces pre-operative expenses.

Date of Decision: 10 April 2026