2024 (9) TMI 285 - AT - Income Tax

Interest income from project setup deposits cannot be automatically adjusted against borrowed fund interest before business commencement

Assistant Commissioner of Income Tax, Circle – 2 (1), Hyderabad. Versus Hinduja National Power Corporation Limited, Hyderabad

ITAT Hyderabad held that interest income from fixed deposits made for project setup cannot be automatically adjusted against interest paid on borrowed ... Taxation of interest income earned from funds borrowed for a project - whether the interest paid by the assessee can be adjusted against the earned income by the assessee on the fixed deposit made by it or not? - HELD THAT:- The law has been settled in the case of Tuticorin Alkali Chemicals and Fertilizers Limited [1997 (7) TMI 4 - SUPREME COURT] wherein it has held that prior to the commencement of the business, there cannot be any adjustment of interest payable by the company against the interest earned by it. Thereafter, another judgment was passed in the case of CIT Vs. Karnal Co-operative Sugar Mills [1999 (4) TMI 7 - SC ORDER] wherein the Hon'ble Supreme Court has distinguished the decision in the case of Tuticorin Alkali Chemicals and Fertilizers Limited [1997 (7) TMI 4 - SUPREME COURT] In our view, a close reading of the Hon'ble Supreme Court in the case of Karnal Co-operative Sugar Mills what has been laid by the Hon'ble Supreme Court was that the interest income earned on such deposits, which is a direct link for the purchase of plant and machinery, had been capitalized and could not be assessed as income from other sources. We are of the opinion that the AO is required to verify as to what was the amount deposited by the assessee to open the letter of credit for honoring its payment, which are directly relatable for setting up of its plants. In case, on verification, the AO concludes that the interest is directly relatable to the interest payment made for deposit in the bank for obtaining a letter of credit, the same shall be allowed. However, if the same is not relevant to the said interest, then the same shall be dealt with in accordance with the law, and more particularly, in light of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Limited (supra) - Appeal of the Revenue is allowed for statistical purposes. Issues:1. Whether interest income earned from funds borrowed for a project should be taxed.2. Whether interest paid on borrowed funds can be set off against interest income earned.3. Whether the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Ltd. is applicable in this case.Analysis:Issue 1:The appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals) regarding the taxation of interest income earned from funds borrowed for a project. The Assessing Officer concluded that the interest receipts must be brought to tax under Section 56 of the Income Tax Act. However, the Assessing Officer disallowed a portion of the interest income and added it back to the total income of the assessee. The appeal before the Tribunal was regarding this disallowance.Issue 2:The main contention in the appeal was whether the interest paid on borrowed funds could be set off against the interest income earned by the assessee. The assessee argued that the interest received on fixed deposits was offered to tax under the head income from other sources, and the interest paid on the borrowing utilized for keeping the fixed deposit was set off under Section 57 of the Act against the interest received. The Revenue, on the other hand, argued that there was no verification of facts regarding the amount required to be deposited for issuance of a letter of credit by the bank and the amount borrowed for the project.Issue 3:The Tribunal referred to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Limited and the subsequent judgment in the case of CIT Vs. Karnal Co-operative Sugar Mills. The Tribunal noted that the interest income earned on deposits directly linked to the purchase of plant and machinery could not be assessed as income from other sources. The Tribunal held that the Assessing Officer needed to verify the direct relevance of the interest paid by the assessee to the interest earned, and if found relevant, it should be allowed. The Tribunal distinguished the decision of the Hon'ble Co-ordinate Bench in the assessee's previous cases as not applicable to the present case.In conclusion, the Tribunal allowed the appeal of the Revenue for statistical purposes, emphasizing the need for verification of the direct link between the interest paid and earned by the assessee.