2010 (12) TMI 1183 - AT - Income Tax

Interest income from borrowed funds taxable under 'Income from other sources' - Tribunal decision

The Tribunal upheld the order of the CIT(A), confirming that the interest income of Rs. 3.09 crores received from fixed deposits made from borrowed funds ... Interest received from fixed deposits (FD) - chargeable to tax - under the head 'Income from other sources - the assessee is in the process of setting up of multi product SEZ project. For the purpose of setting up of the project the assessee borrowed ₹ 289 crores from banks. A part of the amount which was not required immediately was invested in FD with bank. Assessee claimed that that the interest paid on the borrowed funds has to be set off from the interest received on the FD. HELD THAT:- In Case of Tuticorin Alkali Chemicals an Fertilizers Ltd.[1997 (7) TMI 4 - SUPREME COURT] held that In view of section 57(iii), interest paid on OD obtained for the purpose of business could not be deducted from the interest earned on monies kept in FD as such income derived by way of interest on FD was to be taxed under the head 'Income from other sources'. We, however, make it clear that though the assessee may not be entitled to have interest paid by it on OD to the bank, deducted from the interest received by it on the short-term FD, the assessee is entitled to deduction of the same from its business income. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed. In the result, the appeal of the assessee stands dismissed. Issues Involved:1. Taxability of interest received from fixed deposits made from borrowed funds.2. Applicability of Section 57(iii) of the Income-tax Act, 1961.3. Relevance of prior judgments including Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT and Indian Oil Panipat Power Consortium Ltd. vs. ITO.Detailed Analysis:Issue 1: Taxability of Interest Received from Fixed Deposits Made from Borrowed FundsThe primary issue in this appeal is whether the interest income of Rs. 3.09 crores received by the assessee from fixed deposits (FDs) made from borrowed funds should be assessed as 'Income from other sources' or should it reduce the cost of borrowings. The assessee argued that the interest received should be set off against the interest paid on the borrowed funds, as the funds were borrowed for setting up a business and were temporarily parked in FDs.The Tribunal referred to the judgment of the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT, where it was held that interest earned on short-term deposits of borrowed funds, which were not immediately required, is taxable as 'Income from other sources'. The Tribunal found that the facts of the present case were identical to those in Tuticorin Alkali Chemicals & Fertilizers Ltd., and thus, the interest income should be taxed under 'Income from other sources'.Issue 2: Applicability of Section 57(iii) of the Income-tax Act, 1961The assessee contended that the interest paid on the borrowed funds should be deductible under Section 57(iii) of the Income-tax Act, 1961, which allows for the deduction of expenses incurred to earn income from other sources. The Tribunal, however, noted that the Supreme Court in Tuticorin Alkali Chemicals & Fertilizers Ltd. had explicitly stated that the interest paid on borrowed funds for the purpose of purchasing plant and machinery could not be adjusted against interest income under Section 57(iii) because the business had not commenced.The Tribunal further emphasized that the Supreme Court's judgment implicitly considered Section 57(iii) and held that the interest on borrowed funds used for business purposes cannot be set off against interest earned on FDs, as the business had not started.Issue 3: Relevance of Prior JudgmentsThe assessee relied on the judgment of the Delhi High Court in Indian Oil Panipat Power Consortium Ltd. vs. ITO, which distinguished the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. on the basis that the funds were infused for a specific purpose of acquiring land and developing infrastructure. However, the Tribunal found that the Madras High Court in South India Shipping Corporation vs. CIT had considered a similar situation and upheld the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., stating that interest income from FDs is taxable under 'Income from other sources'.The Tribunal concluded that the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. was not applicable to the present case, as the facts were more aligned with those in Tuticorin Alkali Chemicals & Fertilizers Ltd. Additionally, the Tribunal dismissed the assessee's argument for pro-rata allocation of interest, reiterating that the entire interest income from FDs should be taxed under 'Income from other sources'.Conclusion:The Tribunal upheld the order of the CIT(A), confirming that the interest income of Rs. 3.09 crores received from FDs made from borrowed funds is taxable under 'Income from other sources' and cannot be set off against the interest paid on the borrowed funds. The appeal of the assessee was dismissed.