2024 (3) TMI 469 - AT - Income Tax

ITAT allows proportionate interest expenditure deduction under section 57 against debt instrument income

The ITAT Cochin allowed the assessee company's appeal regarding deduction of interest expenditure under section 57. The assessee claimed proportionate ... Claim of Loss - Deduction u/s. 57 - Taxability of real income / net interest income - Capitalization of the impugned interest income, or of setting it off against preoperative expenditure - claim was for being allowed proportionate interest expenditure against interest income inasmuch as the entire investment in PDI is sourced from secured debt - HELD THAT:- The assessee, a company setting-up business during the relevant year, though claiming loss (qua preoperative expenditure, on setting it off interest income), rightly disallowed, restricts it’s claim before us to expenditure incurred by way of interest on secured debt deployed in debt instrument earning interest income, assessed u/s. 56 and, again, rightly so, i.e., in computing the said income. The facts are admitted. It is only real income, unless constrained by law, that is liable to tax. Though the nomenclature ‘perpetual debt’ is inconsistent with the stated position of parking of business funds, surplus for the time being, the same shall have no immediate bearing in the instant case, limited to deductibility of interest on borrowed capital placed in a debt security for interest. Revenue’s insistence on taxing the gross receipt, de hors expenditure there-against, is without any factual or legal basis. In the facts of Tuticorin Alkali Chemicals [1997 (7) TMI 4 - SUPREME COURT] there was no claim of expenditure u/s. 57. It is a clear case of misapplication of a decision, applicable in principle, though distinguishable on facts. The disallowance of the balance expenditure, not agitated before us, gets confirmed by default. Assessee’s appeal is allowed. Issues involved:The judgment involves the appeal by the Assessee against the Order disallowing the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2014-15.Details of the Judgment:Issue 1: Disallowance of loss claim by the Assessing OfficerThe Assessee, engaged in hospitality and agriculture businesses, returned a loss for the relevant year. The Assessing Officer disallowed the claim for loss as the business had not commenced, and interest income was assessed separately. The Assessee argued for the deduction of interest expenditure against interest income sourced from secured debt. The Tribunal observed that the investment in perpetual debt instrument was financed by funds raised through debentures, supporting the Assessee's claim for deduction of interest expenditure. The Tribunal emphasized that only real income, subject to the provisions of the Act, is liable to be taxed.Issue 2: Assessment of interest income under section 56The Tribunal clarified that the interest income on borrowed capital invested in a debt security should be assessed under section 56, allowing deduction of interest incurred. The Tribunal highlighted the importance of assessing only the real income and criticized the Revenue's insistence on taxing the gross receipt without considering the expenditure. The Tribunal differentiated the present case from the Tuticorin Alkali Chemicals case, where there was no claim of expenditure under section 57.Issue 3: Claim for proportionate interest expenditureThe Assessee's claim for deduction of proportionate interest expenditure on borrowed capital invested in the debt security was allowed by the Tribunal. The Tribunal noted that no claim for capitalization of interest was made before them, and the disallowance of the balance expenditure remained unchallenged. The Tribunal upheld the Assessee's claim for deduction of interest expenditure against interest income, in line with the provisions of the Income Tax Act.In conclusion, the Tribunal allowed the Assessee's appeal, emphasizing the correct assessment of income and deduction of interest expenditure. The judgment highlighted the importance of assessing only the real income and following the provisions of the Act.