2019 (11) TMI 1005 - AT - Income Tax

Deduction of interest expenditure U/s 57(3) disallowed - set off with interest income - as held that the said loan was taken by the assessee for construction of hospital and therefore, the expenditure incurred by the assessee is not wholly and exclusively for earning the interest income accordingly, the A.O. capitalized the interest expenditure to the hospital building account and assessed the entire interest income to tax - The assessee challenged the action of the A.O. before the ld. CIT(A) but could not succeed - HELD THAT - We find that when there is no dispute that the loan was taken for construction of the hospital i.e. for bringing an asset into existence then the interest on such loan till the asset is put to use has to be capitalized as per the decision of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT 1997 (7) TMI 4 - SUPREME COURT . On similar footings, when the said amount was to remain ideal with the assessee due to the reason that there was a delay in sanction of the building plan and borrowed fund could not be used for construction of the hospital then the interest received by the assessee has a direct nexus with the construction of the hospital and consequently it would be capitalized and to be used to reduce the cost of construction of the hospital. Accordingly, when the net of the interest received and interest payment would be finally capitalized then the income offered by the assessee to tax as net interest income cannot be disturbed. In view of the above facts and circumstances, the disallowance and addition made by the A.O. is deleted and the net income offered by the assessee to tax is allowed. - Decided in favour of assessee.

Issues Involved:
1. Capitalization of interest expenditure on a term loan.
2. Assessment of interest income as "income from other sources" without allowing corresponding interest expenditure.

Detailed Analysis:

Issue 1: Capitalization of Interest Expenditure on Term Loan
The primary issue revolves around whether the interest expenditure of ?1,17,54,531 incurred on a term loan of ?10 crore obtained from Rajasthan Financial Corporation (RFC) for the construction of a hospital building should be capitalized or allowed as a deduction against the interest income earned. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the interest expenditure should be capitalized as it was incurred for the construction of the hospital building, thus not wholly and exclusively for earning the interest income. The AO capitalized the interest expenditure to the hospital building account, assessing the entire interest income to tax.

The Tribunal, however, noted that the loan amount was not utilized for construction due to a delay in the sanction of the site plan by local authorities. Instead, the amount was advanced to M/s Super Prime Construction Pvt. Ltd., on which the assessee earned interest. The Tribunal referred to the Coordinate Bench’s decision in the case of M/s Barmer Lignite Mining Co. Ltd. Vs DCIT, which held that interest earned on borrowed money deposited in the bank is taxable as "income from other sources". Corresponding expenditure incurred for earning such income is allowable if it is laid out wholly and exclusively for that purpose.

Issue 2: Assessment of Interest Income and Deduction of Corresponding Interest Expenditure
The second issue concerns the assessment of the interest income of ?1,22,28,082 earned on the loan advanced to M/s Super Prime Construction Pvt. Ltd. as "income from other sources" without allowing the corresponding interest expenditure of ?1,17,54,531. The AO and CIT(A) relied on the Supreme Court’s judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, which held that interest income is taxable under "income from other sources" and interest payable on borrowed amounts should increase the cost of the project.

The Tribunal, however, distinguished the facts of the present case from Tuticorin Alkali Chemicals & Fertilizers Ltd., noting that the assessee had been in business for many years and the interest expenditure was not prior to the commencement of business. The Tribunal found that there was a direct nexus between the loan raised and the advance given. The Tribunal also referred to the Delhi High Court’s decision in NTPC Sail Power Co. Pvt. Ltd. Vs CIT, which held that if the interest received is inextricably linked to the setting up of a project, it would be a capital receipt used to reduce the cost of the project.

The Tribunal concluded that when the net interest received and interest payment would be capitalized, the net income offered by the assessee to tax should not be disturbed. Therefore, the disallowance and addition made by the AO were deleted, and the net income offered by the assessee was allowed.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the net interest income offered by the assessee to tax should not be disturbed and the disallowance and addition made by the AO were deleted. The interest expenditure was found to be inextricably linked to the construction of the hospital, and thus, the net interest income was allowed as claimed by the assessee.

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