Tribunal allows appeal for netting off interest income and expenditure

The Tribunal allowed the appeal, directing the Assessing Officer to permit the set off of interest income earned from Fixed Deposits with interest expenditure paid to the bank for machinery purchase. The Tribunal relied on the Supreme Court decision allowing netting off of interest, noting that only surplus interest constitutes income. The appeal was allowed, and judgment was pronounced on 29.08.2018.

---

---

Issues:
Disallowance of set off of interest income.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax [Appeals] regarding the disallowance of set off of interest income. The assessee had set off interest income earned from Fixed Deposits with interest expenditure paid to the bank on monies borrowed for machinery purchase. The Assessing Officer disallowed the claim of set off, which was upheld by the CIT(A). The key argument put forth by the assessee was that since the interest earned and paid were on the same account, the set off should be allowed. The Assessing Officer had acknowledged that the Fixed Deposits were made from surplus funds of bank loans. The contention was supported by the ld. AR, citing the decision of the Hon'ble Supreme Court in ACG Associated Capsules [P] Ltd 343 ITR 89, which allows netting off of interest. It was argued that even if the interest earned had to be taxed separately, the assessee was entitled to deduction for the interest paid under section 57 of the Income Tax Act, 1961.

Upon careful consideration, the Tribunal found merit in the assessee's claim. The Tribunal noted that the Assessing Officer had accepted that the Fixed Deposits were made from surplus funds of bank loans. Referring to the Supreme Court decision, it was established that netting off of interest is permissible, and only surplus interest becomes the income of the assessee. The Tribunal directed the Assessing Officer to allow the netting off of interest earned from interest paid. Consequently, the appeal filed by the assessee was allowed, and the judgment was pronounced in the open court on 29.08.2018.

---