2018 (9) TMI 100 - AT - Income Tax

Disallowing set off of interest income - netting off of interest - deduction for the payment of interest u/s 57 - Held that - There is no dispute that the Assessing Officer has himself accepted that the Fixed Deposits made in ING Vysya Bank were out of the surplus funds of bank loans. Hon ble Supreme Court in the case of ACG Associated Capsules P Ltd 2012 (2) TMI 101 - SUPREME COURT OF INDIA has categorically held that netting off of interest is permissible. Interest earned from the bank and interest paid to the bank has to be netted off and only surplus interest becomes income of the assessee. Assuming, yet not accepting that interest earned by the assessee has to be taxed under the head income from other sources, then also the assessee is entitled for deduction for the payment of interest u/s 57 of the Income tax Act, 1961. Thus Interest income has to be netted off and we direct the Assessing Officer to allow netting off of interest earned from interest paid. - decided in favour of assessee

Summary

Issues:
Disallowance of set off of interest income.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax [Appeals] regarding the disallowance of set off of interest income. The assessee had set off interest income earned from Fixed Deposits with interest expenditure paid to the bank on monies borrowed for machinery purchase. The Assessing Officer disallowed the claim of set off, which was upheld by the CIT(A). The key argument put forth by the assessee was that since the interest earned and paid were on the same account, the set off should be allowed. The Assessing Officer had acknowledged that the Fixed Deposits were made from surplus funds of bank loans. The contention was supported by the ld. AR, citing the decision of the Hon'ble Supreme Court in ACG Associated Capsules [P] Ltd 343 ITR 89, which allows netting off of interest. It was argued that even if the interest earned had to be taxed separately, the assessee was entitled to deduction for the interest paid under section 57 of the Income Tax Act, 1961.

Upon careful consideration, the Tribunal found merit in the assessee's claim. The Tribunal noted that the Assessing Officer had accepted that the Fixed Deposits were made from surplus funds of bank loans. Referring to the Supreme Court decision, it was established that netting off of interest is permissible, and only surplus interest becomes the income of the assessee. The Tribunal directed the Assessing Officer to allow the netting off of interest earned from interest paid. Consequently, the appeal filed by the assessee was allowed, and the judgment was pronounced in the open court on 29.08.2018.