2019 (11) TMI 1076 - AT - Income Tax

Net interest income for deduction u/s. 80 IA - Allowable expenditure u/s. 57 (iii) - netting of off interest expenditure and interest income - HELD THAT - We find merit in the arguments advanced by the assessee that such interest expenditure is an allowable expenditure u/s.57 (iii) even if the said interest income is considered as income from other sources by deviating from the stand of the department in the preceding as well as subsequent assessment years when such interest income has been treated as business income. A perusal of the order of CIT(A) shows that assessee had given the bifurcation of interest income on loans and advances to parties and the interest expenditure on such borrowings and has shown net interest income of ₹ 7,85,61,480/- on which no deduction u/s. 80 IA has been claimed. There is a direct nexus between the interest income of ₹ 23.96 lakhs and interest expenditure of ₹ 20.30 lakhs. We find the Hon ble Delhi High Court in the case of Vodafone South limited Vs. CIT 2015 (10) TMI 22 - DELHI HIGH COURT after considering the decision of Tuticorin Alkai Chemicals and Fertilizers Ltd. 2015 (10) TMI 22 - DELHI HIGH COURT has held that where assessee having availed of loan from HSBC, advanced said amount to its holding company, i.e. SCL and since there was a direct nexus between earning of interest on loan advanced by assessee to SCL and payment of interest to HSBC on loan drawn in terms of sanction letter, assessee s claim for netting off of interest in terms of section 57 (iii) was to be allowed. The various other decisions relied by the ld. Counsel for the assessee also support his case that such interest expenditure has to be allowed as deduction from such interest income if such interest income is treated as income from other sources. We, therefore, hold that the assessee is entitled to netting of off interest expenditure and interest income. Even if the proposition laid down by the CIT(A) that principle of rejudicata is not applicable to the income tax proceedings is accepted, however, the rule of consistency has to be followed. Since the revenue in the preceding as well as subsequent years has accepted such netting off of interest expenses from such interest income, therefore, on this score also the assessee is entitled to netting off. We, therefore, set aside the order of the CIT(A) and allow the grounds on this issue.

Summary

Issues Involved:
1. Re-computation of deduction under Section 80IA.
2. Taxability and treatment of interest income.
3. Allowability of interest expenditure under Section 57(iii).
4. Jurisdiction and powers of CIT(A) to enhance income.

Issue-wise Detailed Analysis:

1. Re-computation of Deduction under Section 80IA:
The Assessing Officer (AO) recomputed the deduction claimed by the assessee under Section 80IA, allocating 10% of the employee cost to other income, thereby reducing the deduction by ?11,97,900/-. The CIT(A) deleted this addition but issued an enhancement notice, proposing that the entire interest expenditure of ?20,30,27,153/- should not be deducted from the interest income of ?28,15,88,633/-, as the interest income should be taxed under "income from other sources" and not as business income.

2. Taxability and Treatment of Interest Income:
The CIT(A) held that the interest income should be taxed under "income from other sources" and not as business income, contrary to the treatment in earlier and subsequent years. The assessee argued that such interest income was consistently treated as business income and that the CIT(A) cannot introduce a new source of income. The Tribunal found merit in the assessee's argument, noting that the interest income had a direct nexus with the interest expenditure, and thus, the interest income should be netted off against the interest expenditure.

3. Allowability of Interest Expenditure under Section 57(iii):
The CIT(A) rejected the assessee's claim for deduction under Section 57(iii), relying on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. However, the Tribunal, considering various judicial precedents, including decisions from the Delhi High Court, held that the interest expenditure is allowable under Section 57(iii) if there is a direct nexus between the interest income and the interest expenditure. The Tribunal allowed the netting off of interest expenditure against interest income.

4. Jurisdiction and Powers of CIT(A) to Enhance Income:
The assessee contended that the CIT(A) exceeded his jurisdiction by introducing a new source of income. The Tribunal did not adjudicate on this ground, as it found in favor of the assessee on the substantive issues. The Tribunal noted that the rule of consistency should be followed, and since the revenue had accepted the netting off of interest expenses in preceding and subsequent years, the assessee's treatment of interest income and expenditure should be accepted.

Conclusion:
The Tribunal allowed the appeal partly, holding that the interest expenditure is deductible under Section 57(iii) and should be netted off against the interest income. The Tribunal set aside the CIT(A)'s order and upheld the assessee's treatment of interest income and expenditure, emphasizing the need to follow the rule of consistency. The Tribunal did not adjudicate on the issue of CIT(A)'s jurisdiction to enhance income by introducing a new source of income, as it became academic in nature.