2010 (6) TMI 604 - AT - Income Tax

Set off of interest expenditure with interest income - income from other sources - AO is of the opinion that cannot claim the adjustment of interest payable against interest so earned and assessable under section 56.- Held that - the borrowing has been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts. - there is direct nexus between the amount advanced and amount borrowed - Decided in favor of assessee.

Summary

Issues:
- Whether interest expenditure should be allowed from interest earned during the construction period.

Analysis:
The issue in this case revolves around the treatment of interest expenditure from interest earned during a construction period. The Assessing Officer contended that since the business had not commenced, the expenses should be capitalized until business activities start. The Assessing Officer relied on judicial pronouncements to assess the interest income as income from other sources. The appellant argued that two separate loans were raised for different purposes - one for earning interest and the other for capital expenditure. The Commissioner of Income-tax (Appeals) analyzed the case, distinguishing it from previous judgments. He acknowledged the direct correlation between the interest earned and interest spent on borrowed amounts. Consequently, he directed to allow interest expenditure of Rs. 6,14,992 from the assessed income of Rs. 6,92,000, resulting in a net taxable income of Rs. 77,008 under 'other sources'.

The Assessing Officer's decision was based on the premise that interest payable could not be adjusted against interest earned and assessable under section 56, as the business had not yet started. However, the Commissioner of Income-tax (Appeals) found a direct nexus between the amount advanced and borrowed, leading to the conclusion that the interest expenditure should be allowed. The Commissioner highlighted the distinction between the current case and the precedent relied upon, emphasizing the purpose of the loans raised by the appellant. By allowing the interest expenditure against the interest income, the Commissioner aimed to arrive at a fair and accurate assessment of the taxable income under 'other sources'.

The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals), dismissing the Revenue's appeal. The Tribunal concurred with the finding that there was a direct correlation between the amount advanced and borrowed, justifying the allowance of interest expenditure from interest earned. By affirming the order, the Tribunal maintained that the treatment of interest expenditure was appropriate in this context, resulting in a net taxable income of Rs. 77,008. The judgment emphasizes the importance of establishing a clear link between the borrowed amounts and the interest expenditure to determine the tax implications accurately.