2014 (12) TMI 889 - AT - Income Tax

Disallowance of Interest inter-corporate deposit - currency swap arrangement with the Bank to reduce the burden of the interest cost - impact the overall interest claim - Held that - The assessee borrowed a loan of ₹ 81.30 Crores from JP Morgan Chase Bank on 18.12.2006 for the purpose of construction of Forum Value Mall at Whitefield, Bangalore on which interest was payable on a monthly basis @ 12.25% per annum - assessee then entered into a currency swap arrangement with ABN Amro Bank to reduce the burden of interest cost and for hedging the interest rate risk - interest paid on the loan of ₹ 81.30 Crores for the period 1.4.2007 to 31.3.2008 totally amounted to ₹ 8,49,32,272 - Out of this interest amounting to ₹ 5,32,82,402 was determined as interest cost relatable to the inter-corporate deposit and the same was debited to the profit and loss account - the finding of the AO that the currency swap arrangement was only in respect of unutilised funds is factually erroneous - the currency swap arrangement and the resultant income therefrom amounting to ₹ 1,75,28,315 was in respect of the entire loan and the same was linked to the loan borrowed for the purpose of reduction of interest cost. The interest debited to the profit and loss account amounting to ₹ 5,32,82,402 was incurred for earning income from the inter-corporate deposit and the currency swap arrangement and in the regular course of business carried on by the assessee and the interest so debited to the profit and loss account is admissible as a deduction u/s 57(iii) of the Act or alternatively u/s 37(1) - an amount of ₹ 3,16,47,870 was capitalised as part of the funds were used for the ongoing construction of Forum Value Mall and the balance sum of ₹ 3,57,54,087 (Rs.6,74,01,957 less ₹ 3,61,47,870) only could have been charged to the profit and loss account - while the AO has computed the interest cost pertaining to the intercorporate loan at ₹ 3,85,49,961 @ 12.25% on the day to day balance, the net interest paid charged to the profit and loss account as per the working at ₹ 3,57,54,087 is lower than the interest cost computed at ₹ 3,85,49,961 by the AO - the assessee has not made any excess claim on account of interest Decided against revenue.

Summary

Issues Involved:
1. Disallowance of Interest: Rs. 1,47,32,441.

Detailed Analysis:

Disallowance of Interest: Rs. 1,47,32,441
Facts of the Case:
The assessee, a company engaged in real estate and construction, filed its return of income for Assessment Year 2008-09, declaring an income of Rs. 77,38,420. The case was taken up for scrutiny, and the assessment was completed under section 143(3) of the Income Tax Act, 1961, determining the income at Rs. 2,24,70,861 after disallowing interest amounting to Rs. 1,47,32,441. The assessee appealed to the CIT(Appeals), who allowed the appeal. The Revenue then appealed to the ITAT.

Revenue's Grounds of Appeal:
The Revenue contended that the CIT(Appeals) erred in holding that the currency swap income, which had no separate costs, did not impact the overall interest claim. They argued that the income from the currency swap arrangement was from unutilized loan funds and not from any specific investment made by the assessee.

Assessee's Arguments:
The assessee borrowed Rs. 81.30 Crores from JP Morgan Chase Bank for constructing 'Forum Value Mall' and entered into a currency swap arrangement to reduce interest costs. The assessee placed Rs. 63 Crores of the loan as an inter-corporate deposit with Prestige Estate Projects Ltd., earning interest at 13% per annum. The assessee argued that since the interest on the inter-corporate deposit and the income from the currency swap arrangement were higher than the interest debited to the profit and loss account, no disallowance should be made. The currency swap arrangement was intended to hedge interest rate risk, not for speculation.

ITAT's Findings:
1. Interest Computation:
- The assessee's interest expenditure on the loan was Rs. 8,49,32,272, out of which Rs. 5,32,82,402 was debited to the profit and loss account, and Rs. 3,16,47,870 was capitalized.
- The Assessing Officer (AO) allowed only Rs. 3,85,49,961 as a deduction, disallowing Rs. 1,47,32,441, based on the interest cost of funds kept as an inter-corporate deposit.

2. Currency Swap Arrangement:
- The currency swap arrangement was with ABN Amro Bank, where the INR loan was notionally swapped with CHF to reduce interest costs.
- The ITAT found that the currency swap arrangement was for the entire loan and not just the unutilized funds, as concluded by the AO.

3. Interest Deduction:
- Under section 57(iii) of the Act, any expenditure wholly and exclusively for earning income is allowable as a deduction. The interest debited to the profit and loss account was incurred for earning income from inter-corporate deposits and the currency swap arrangement.
- The ITAT held that the entire interest debited to the profit and loss account was admissible as a deduction under section 57(iii) or alternatively under section 37(1) of the Act.

4. Interest Income vs. Interest Expenditure:
- The interest income from inter-corporate deposits and the currency swap arrangement was higher than the interest expenditure debited to the profit and loss account.
- The ITAT found the AO's disallowance of Rs. 1,47,32,441 factually incorrect and deleted the disallowance.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT(Appeals) order allowing the assessee's claim for interest deduction. The ITAT concluded that the entire interest expenditure was incurred for earning income from inter-corporate deposits and the currency swap arrangement, and thus, was allowable as a deduction. The ITAT also noted that the currency swap arrangement was for the entire loan and not just the unutilized funds.

Order Pronounced:
The order was pronounced in the open court on 14th Nov., 2014.