2017 (10) TMI 1595 - AT - Income Tax

Income from other sources or capital receipt - interest income - interest received on Fixed Deposits from the capital work-in-progress and being interest received against margin money - Allowance of relatable interest expenditure incurred on interest income u/s. 57(iii) - Assessee before us filed complete details of interest received and interest paid including the banks from which loans have been taken by the assessee and the FDRs made by it - HELD THAT - We find that this issue has been considered by Hon ble Supreme Court in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd 1999 (4) TMI 7 - SC ORDER as clearly laid down the principal that the deposit of money which are directly linked with the purchase of plant and machinery, any income earned on such deposit which was incidental to the acquisition of asset for the setting up of plant and machinery, the consequential interest was capital receipt which would go to reduce the cost of asset. Similar view was taken by the Supreme Court in the case of Bongaigaon Refinery Petrochemicals Ltd 2001 (7) TMI 4 - SUPREME COURT Respectfully following the judgment of Hon ble Supreme Court, we also direct the Assessing Officer to find out from the details whether this interest earned was out of the borrowed funds, which was directly linked to the purchase of plant and machinery, in that eventuality, the Assessing Officer will treat the interest as capital receipt. In case the interest is relatable to surplus funds, out of share capital and reserve surplus, interest will be treated as Income from other sources . As regards to deductibility of interest expenditure, in case the AO treat this interest receipt as income from other sources, the same shall be considered by Ld. AO as per law. We direct the Assessing Officer accordingly.

Summary

Issues Involved:
1. Treatment of interest income as income from other sources and allowance of related interest expenses.

Analysis:
1. The appeal and cross-objection arose from the order of the Commissioner of Income Tax (Appeals) concerning the treatment of interest income and related expenses for Assessment Year 2011-12 under the Income Tax Act, 1961.
2. The main issue was whether the interest income of ?4,24,30,920/- should be assessed as income from other sources and if related interest expenses should be allowed. The Revenue contended that the interest expenditure should not be allowed as the borrowed funds were not meant for earning interest.
3. The Assessing Officer observed that the assessee had parked borrowed funds in fixed deposits to earn interest, which the assessee reduced from capital work-in-progress to avoid tax. The Assessing Officer treated this interest income as taxable income from other sources, resulting in an addition of ?5,14,76,310/.
4. The CIT(A) referred to relevant Supreme Court decisions and held the interest income as earned on temporary deposits during the construction stage, taxable as income from other sources. However, related interest expenses were allowed. The CIT(A) also ruled that interest earned on deposits kept as margin money was not taxable and should reduce the cost of fixed assets.
5. The assessee contended that the interest received was linked to setting up the project and should be treated as a capital receipt, reducing the cost of the project. The Tribunal considered the surplus funds kept as fixed deposits and directed the Assessing Officer to determine if the interest earned was directly linked to the purchase of plant and machinery.
6. Following Supreme Court precedents, the Tribunal instructed the Assessing Officer to treat interest as a capital receipt if linked to the purchase of assets and as income from other sources if related to surplus funds. The deductibility of interest expenditure was to be considered by the Assessing Officer based on the treatment of interest income.

In conclusion, the appeal of the Revenue and the cross-objection of the assessee were partly allowed for statistical purposes based on the detailed analysis and directions provided by the Tribunal.