TaxTMI 
TaxTMI 
2020 (8) TMI 151
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....f the assessee was assessed at Rs. 12,59,504/-. Thereafter the assessment was reopened by issue of notice u/s 148 of the Act. The assessment of the assessee was completed u/s 147 r.w.s. 143(3) of the Income Tax Act, 1961 vide order dated 12.12.2017 assessing the total income of Rs. 2,44,71,470/- by making the following additions: - a) Disallowance on account of Interest income Rs. 2,35,68,701/- b) Disallowance as per provisions of section 14A Rs. 9,02,770/- 2.3 Aggrieved from the assessment order, the assessee filed appeal before CIT(A). The ld. CIT (A) allowed the appeal of the assessee. Aggrieved from the order of ld. CIT (A), the revenue is in appeal before us wherein the Revenue challenged the deletion of addition of Rs. 2,35,68,701/- made by AO on account of interest income. 2.4 While deleting the addition on account of interest income, the precise observation of the ld. CIT(A) is as under:- ''I have gone through assessee's submission and AO's findings. The issue raised in Ground of appeal no. 1 is related to disallowance of interest income of Rs. 23568701/- by not allowing proportional deduction of interest expenses. The appellant has referred to the order ....
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....of the view that in that sense it could be held that the business of the appellant had commenced and against the income, expenses would be allowed. It is also observed that the share capital of the assessee had already been utilized in the purchase of assets in the earlier years as per the balance sheet of the earlier years (AY 2008-09). Thus subsequent borrowings could be only for either purchase of more assets or in the intervening period for advancing loans to other entities on which interest was earned. Since the funds were already borrowed and could have been fully capitalized legally by the appellant as its business had 'commenced' per the discussion made above, the appellant had in fact reduced the expenses by earning income from the funds borrowed by advancing them to others. It is not also the AO's case that interest disallowance due to discussion of borrowed interest bearing funds was possible for advancing to related entities free of interest. He has also not bothered to detail even the head under which he has worked out the income from interest earned. In fact he has allowed amortization of preliminary expenses which shows that the business activities ar....
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.... and interest so paid should be allowed as expenditure in earning interest-Held, yes Thus, in view of the facts and legal precedents on the alternate view as well, in my opinion, the net of interest borrowed 86 earned being Rs. 1,59, 96,193/- was rightly capitalized by the appellant company in the respective fixed assets under process of being set up. No addition of Rs. 2,35, 68,701/- should thus have been made separately by the AO. The addition is therefore directed to be deleted.'' 2.5 However, the disallowance made u/s 14A was confirmed by the ld.CIT(A) against which the assesse is not in appeal before us. 2.6 It was argued by the ld.DR that the ld. CIT(A) has wrongly deleted the disallowance of interest expenditure in so far as the assessee had not shown any business income. Ld. DR further relied on the order passed by the AO. 2.7 On the other hand, it was contended by the ld. AR of the assessee that interest expenditure was incurred for the purpose of business and the same was incurred after assessee commenced operation. Therefore, the same was to be allowed against interest income. As an alternate, the ld. AR of the assessee contended that even if the interest income is ....
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....nary expenses which is always allowed upon commencement of business activities. Thus the assessee was not in pre-commencement period and set-off of interest income of Rs. 2,35,68,701/- with interest expenses was claimed as allowable & balance amount of Rs. 1,59,96,193 has been capitalized in the respective fixed assets. 2.9 From the record, we also found that investment in interest earning advances were out of interest bearing funds borrowed by the assessee. In this regard, we observe that in AY 2008-09 in which the company was incorporated, the share capital was entirely utilized in investment of fixed assets and thereafter the subsequent borrowing were made either for purchase of more assets or in intervening period for advancing loans to other entities on which interest was earned. The assessee has also established nexus of interest paid with interest received i.e. utilisation of interest bearing borrowed funds into interest earning advances. Therefore, there is no justification for disallowing interest expenditure so incurred. Even if the interest received by the assessee is treated as taxable under the head "Income from Other Sources" then still the deduction on a/c of inter....