2020 (2) TMI 73 - AT - Income Tax

Taxability of interest earned from time deposits - whether it is taxable under the head income from other sources or it can be reduced from capital work-in-progress, when the funds are inextricably linked with project funds ? - HELD THAT - The co-ordinate bench of ITAT, Mumbai G bench in assessee s own case for AY 2011-12 had considered an identical issue and after considering relevant facts and also by following another co-ordinate bench decision, in the case of Infrastructure Development Company of Rajasthan Ltd. vs DCIT 2016 (9) TMI 957 - ITAT JAIPUR held that interest earned from time deposits kept out of surplus funds available to the assessee out of project funds is deductable from the capital working progress We are of the considered view that interest earned from time deposits kept in banks out of surplus funds of project is rightly reduced from capital work-in-progress. Therefore, we direct the Ld. AO to delete additions made towards interest income under the head income from other sources. Disallowances of expenses u/s 37(1) - assessee had incurred total expenditure under the head other expenses - HELD THAT - In this case, the Ld.CIT(A) after considering the nature of expenditure and its relevance for maintaining the corporate status of the assessee has allowed director s fees and audit fees on the ground that the above mentioned expenses are required to be incurred to maintain the corporate status of the assessee. The balance expenditure has been disallowed, on the ground that they are not related to maintaining the corporate status of the assessee. The assessee has furnished details of expenditure, as per financial statements prepared for the year. Ongoing through, the nature of expenditure debited into the profit and loss account under the head other expenses, we find that they are all general expenses, which are not directly related to maintain the corporate status of the assesee. Therefore, we are of the considered view that the Ld.CIT(A) was right in allowing only director s fees and audit fees out of total expenditure debited under the head other expenditure and disallowed balance amount, on the ground that they are not related maintaining the corporate status of the assessee. Insofar as, alternate ground of the assesee that if, the claim of the deduction is not accepted towards said expenditure, then the said sum may be added to capital work-in-progress. No doubt, the assessee is entitled for deduction towards certain expenditure incurred, either as revenue expenditure or if said expenditure is not in the nature of revenue expenditure, the same needs to be capitalized to work-in-progress. Since, we held that remaining expenditure is not in the nature of revenue expenditure, which could be allowed u/s 37(1), the Ld. AO is directed to add the balance expenditure to capital work-in-progress account.

Summary

Issues Involved:

1. Taxability of interest income from time deposits.
2. Entitlement to deduction of interest paid against interest income.
3. Treatment of interest payment if not allowed as deduction.
4. Deduction of expenses under section 37(1) of the Income Tax Act.
5. Liability for payment of interest under section 234B.

Detailed Analysis:

Issue 1: Taxability of Interest Income from Time Deposits

The primary issue was whether the interest income of ?75,96,711/- earned from time deposits should be taxed under the head "Income from Other Sources" or could be reduced from the capital work-in-progress. The assessee argued that the interest income should be considered as part of the business income and reduced from the capital work-in-progress, relying on the decision in CIT vs. Bokaro Steel Ltd. and Indian Oil Panipat Power Consortium Ltd. The AO, however, assessed it under "Income from Other Sources," citing the Supreme Court's decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs CIT, where it was held that interest income earned from surplus funds should be taxed under "Income from Other Sources." The Tribunal, after considering various judicial precedents, concluded that the interest income should be reduced from the capital work-in-progress, aligning with the decision in Pune Sholapur Road Development Company Ltd. vs ITO, where it was held that interest earned from time deposits kept out of surplus funds of the project should be deducted from the capital work-in-progress.

Issue 2: Entitlement to Deduction of Interest Paid Against Interest Income

The assessee claimed a deduction of ?2,48,92,602/- being the interest paid against the interest income. The AO and CIT(A) denied this deduction, referencing the Supreme Court's decision in CIT vs. Dr. V.P. Gopinathan, which established that interest paid on loans taken for purposes other than earning interest income cannot be deducted under section 57(iii) of the Income Tax Act. The Tribunal upheld this view, stating that the interest payable on borrowed funds for business purposes cannot be adjusted against the interest income classified under "Income from Other Sources."

Issue 3: Treatment of Interest Payment if Not Allowed as Deduction

The assessee, as an alternative, requested that if the interest income is taxed under "Income from Other Sources" and the deduction of interest payment is not allowed, then the interest payment should be added to the capital work-in-progress. The Tribunal agreed with this alternative, directing the AO to add the balance expenditure to the capital work-in-progress account, recognizing that if the expenditure is not allowed as revenue expenditure, it should be capitalized.

Issue 4: Deduction of Expenses Under Section 37(1) of the Income Tax Act

The assessee claimed a deduction of ?38,78,373/- under section 37(1) of the Income Tax Act, which was partially allowed by the CIT(A) to the extent of ?2,90,600/- for director’s fees and audit fees, as these were necessary to maintain the corporate status of the assessee. The Tribunal upheld this partial allowance, noting that the remaining expenses were not directly related to maintaining the corporate status and should not be allowed as revenue expenditure. However, the Tribunal directed that the disallowed expenses be added to the capital work-in-progress.

Issue 5: Liability for Payment of Interest Under Section 234B

The assessee contested the liability for interest under section 234B. The Tribunal did not provide a detailed analysis on this issue in the summarized judgment.

Conclusion:

The Tribunal concluded that the interest income from time deposits should be reduced from the capital work-in-progress and not taxed under "Income from Other Sources." The deduction of interest paid against interest income was denied, but the Tribunal allowed the addition of disallowed expenses to the capital work-in-progress. The partial allowance of expenses under section 37(1) was upheld, while the remaining expenses were directed to be capitalized. The appeal was partly allowed.