2018 (11) TMI 1256 - HC - Income Tax

Entitlement to claim set off of interest income from fixed deposits from the interest paid on borrowed funds - the borrowed funds having been invested in short term fixed deposits till it was utilised - The assessee is a Company, which at that point of time was constructing an air port, for which purpose advances were taken from HUDCO. The funds were parked in short term Fixed Deposits which earned interest income - Held that - The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under Section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the expenditures which are allowable as deduction from income assessable under Section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under Section 57 of the Act. In the first assessment year there is yet another question as to whether the expenditure claimed on salary could have been allowed as against the interest income earned by the assessee from Fixed Deposit. The assessee had claimed expenditure of salary paid to its employees from the interest income earned from the Fixed Deposits. Admittedly, at that point, there was no business income available to the assessee since the air port had not been established. The above extracted paragraph also answers this question. Hence there could have been no expenditure claimed under the Income Tax Act. We hence answer that question also against the assessee and in favour of the Revenue.

Summary

Issues involved:
1. Entitlement to claim set off of interest income from fixed deposits against interest paid on borrowed funds.
2. Allowability of expenditure claimed on salary against interest income earned from fixed deposits.

Entitlement to claim set off of interest income from fixed deposits against interest paid on borrowed funds:
The case involved the question of whether the assessee, a company constructing an airport, was entitled to claim a set off of interest income from fixed deposits against the interest paid on borrowed funds. The Tribunal attempted to distinguish a previous Supreme Court decision but was found to be incorrect. The High Court referred to the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax, emphasizing that income earned by utilizing borrowed funds is taxable unless expressly exempted. The court clarified that the source of income being borrowed money does not exempt it from taxation. The court also highlighted that the assessee cannot claim adjustment of interest expenditure against interest assessable under Section 56, as the provisions of Section 57 of the Act govern allowable deductions from income assessable under Section 56. Therefore, the court held in favor of the Revenue, allowing the appeals and restoring the order of the Assessing Officer.

Allowability of expenditure claimed on salary against interest income earned from fixed deposits:
In the first assessment year, there was a question regarding whether the expenditure claimed on salary could be allowed against the interest income earned from fixed deposits. The assessee had sought to claim expenditure on salary paid to its employees from the interest income earned from fixed deposits. However, since there was no business income available to the assessee at that point, as the airport had not been established, the court ruled against the assessee. Referring to the earlier explanation, the court concluded that no expenditure could be claimed under the Income Tax Act in this scenario. Therefore, the court answered this question against the assessee and in favor of the Revenue, ultimately allowing the appeals and restoring the Assessing Officer's order.

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