TaxTMI 
TaxTMI 
2019 (1) TMI 1204
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....The brief facts of the case are that the assessee is a firm and filed its return of income on 15.10.2010 declaring income at Rs. Nil. The case was selected for scrutiny and statutory notices duly issued and served on the assessee. The assessee is in the business of Developer and Builders. The Assessing Officer noted that the assessee had given details of other income of Rs. 78,48,881/- which included interest received of Rs. 77,12,931/-. The Assessing Officer noted that the assessee has borrowings funds from Banks the funds of which were advanced to related parties from whom interest had been received. This, the Assessing Officer held to be chargeable under income from other sources. It is this addition to the total income that the assessee has challenged. 3. Before the Ld. CIT(Appeals), the assessee had filed detailed written submissions on this issue which is as under: "1.0 Ground of Appeal No.1 The AO erred in separately charging interest income of Rs. 77,12,931 under the head 'Income from Other Sources. The appellant pleads that its income was correctly computed and declared under the head Profits & Gains of Business and that the AO's action is not ....
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....e had not commenced business. During construction and establishment of its factory, the company invested in short term deposits funds borrowed for setting up its factory. The assessee claimed that interest income was to be netted off against pre production expenditure which was capitalized. No claim was made u/s 57(iii). The Court held that interest earned on investment of a portion of term loans which were lying idle for a certain interim period prior to commencement of business would not go to reduce the pre- production expenses but was taxable under the head 'Income From Other Sources'. 1.9 In the present case the assessee had commenced business and used borrowed funds for its revenue earning activities and incurred interest expenses. To the extent funds were diverted to related parties, interest was recovered, thereby maximizing PGBP and claiming interest on borrowings to the extent incurred wholly and exclusively for business purpose. 1.10 Section 56 of the IT Act, 1961 reads as follows: 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income tax under the head "Income from Other Source....
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.... Rs. 77,12,931 separately under the head IFOS, then the corresponding interest expense on borrowing Rs. 77,12,931 logically ought to be considered and netted off in computing income. 2.5 The relevant portion of Section 57 of the IT Act 1961 reads as under: 57. The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions namely:- (i)........( not relevant)....... (ii) ......(not relevant)..... (iii) any other expenditure ( not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. The AO adverts to the narrower import of the words of the section to reach his conclusion without appreciating that the assessee had diverted borrowed funds in respect of which interest expense incurred falls clearly within the language of section 57(iii). 2.6 As regards the cited case law:- (i) in the case of Amalgamation Ltd(Supra) the question before the Court was whether interest paid by the assessee company on borrowings for purpose of paying estate duty was admissible business expenditure ....
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....penditure incurred by the appellant was allowable under section 57 of the I.T. Act, 1961 while computing interest income sought to be assessed as Income from Other Sources under Sec.56, as expenditure incurred for earning the income? The Court in para 15 of the order held that the question is dependant on the fact whether the assessee had commented its business. So long the business is not commenced, the interest paid cannot be treated as revenue expenditure, but (was) to be included in the actual cost for being capitalized as capital expenditure, and, therefore, it could not have been treated to be an expenditure incurred within the meaning of Sec.57(iii). (iii) In the case of Moody (Supra) dealing with the language of Section 57(iii) the Supreme Court observed: "It is true that the language of section 37(1) is a little wider than that of section 57(iii), but we do not Lsee how that can make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambigious and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section whi....