2019 (1) TMI 473 - HC - Income Tax

Interest on the Fixed Deposits Receipts ( FDRs ) in bank and Inter-Corporate Deposits ( ICDs ) with sister concerns earned by assessee - taxable under the head income from other sources OR business income - not allowing deduction of the interest paid from interest received - Held that - Papers and documents referred to in the impugned order, have not been filed before us to show any incongruity and perversity in the factual and consequently in the legal finding. Accordingly, we do not think that the Assessing Officer and the First Appellate Authority were justified in not allowing deduction of the interest paid from interest received. Interest of ₹ 1,78,03,962 /- cannot be deducted/set-off from interest paid at the performance guarantees for the two blocks were given by the respondent- assessee. Interest earned on the FDRs obtained to procure the performance bank guarantees was connected with the two oil blocks. The Tribunal has mentioned that the Commissioner of Income Tax (Appeals) had allowed deduction under Section 35D thereby indirectly accepting that assessee had commenced business. the assessee had advanced more than ₹ 12.11 Crores to M/s Jubilant Capital Private Limited in furtherance to the business transfer agreement to meet the cash calls for participatory interest in the Ankleshwar Block. Thus, the finding that the business was set up has sufficient backing and support from the material and evidence referred to in the impugned order. In any case, this objection regarding commencement of business loses much significance and importance in view of the direct nexus between interest paid and interest received on ICDs. Interest paid to earn interest has to be allowed as a deduction under Section 57 of the Act. - Decided against revenue.

Summary

Issues:
1. Allowability of expenses incurred by the respondent-assessee.
2. Treatment of interest paid and received by the respondent-assessee.
3. Determination of whether the business of the respondent-assessee was set up and ready for commencement.

Analysis:
1. The issue of the allowability of expenses incurred by the respondent-assessee was raised by the Revenue, contending that the business was not set up and ready for commencement. The respondent-assessee was formed for oil and gas exploration but had not completed the transfer of interests due to pending approvals. The Revenue argued that certain expenses, including interest paid to a sister concern and interest earned on FDRs and ICDs, should not be treated as revenue expenses. However, the respondent-assessee presented evidence of transactions and advances made, indicating that the business was indeed operational and had commenced activities, as supported by the Tribunal's findings.

2. The treatment of interest paid and received by the respondent-assessee was a crucial aspect of the case. The Revenue claimed that interest paid should not be deductible as a revenue expense, while interest earned should be taxable under 'income from other sources'. On the contrary, the respondent-assessee demonstrated a clear nexus between the interest paid and received, showing that the interest paid was directly related to earning interest income. The Tribunal accepted this argument, emphasizing that even if interest received was taxable under a different category, the interest paid was allowable as a deduction under Section 57 of the Income Tax Act.

3. The determination of whether the business of the respondent-assessee was set up and ready for commencement was another key issue. The Tribunal examined the business transfer agreement, expenses incurred, and advances made by the respondent-assessee to conclude that the business had indeed commenced operations. The performance bank guarantees provided by the respondent-assessee further supported the finding that the business was operational. Despite some objections regarding the commencement of business, the direct correlation between interest paid and received on ICDs was deemed significant, leading to the allowance of interest paid as a deduction under Section 57 of the Act.

In conclusion, the High Court dismissed the appeal by the Revenue, upholding the Tribunal's findings that the expenses were allowable, the interest paid and received were interconnected, and the business of the respondent-assessee was set up and ready for commencement based on the evidence presented.