2020 (9) TMI 812 - AT - Income Tax

Netting off of the interest income against interest expenditure - taxing interest received during pre-construction period under the head Income from other sources - contention that where the fixed deposits are inextricably linked with the business of the assessee, the interest income therefrom has to be set off against the preoperative expenses of the assessee - HELD THAT - We find that the assessee has deposited the funds which were not immediately required for the assessee s business and as and when required, they were immediately withdrawn and used for business purposes. Therefore, there is a distinction in facts between earlier years where the Tribunal decided the issue against the assessee, and the AYs before us. Thus following the decision of the coordinate bench of ITAT, Mumbai in the case of Kamat Hotels (India) ltd. 2017 (11) TMI 849 - ITAT MUMBAI we direct the AO to allow the netting off of the interest income against interest expenditure. Accordingly, the additional ground of appeal of the assessee is allowed.

Issues Involved:
1. Taxability of interest earned on fixed deposits under the head "Income from other sources."
2. Netting off interest earned on fixed deposits against interest expenditure on borrowed funds.
3. Treatment of interest received during the pre-construction period as a capital receipt.

Issue-wise Detailed Analysis:

1. Taxability of Interest Earned on Fixed Deposits:
The primary issue was whether the interest earned on fixed deposits should be treated as "income from other sources." The assessee argued that the interest income should not be treated as "income from other sources" because the funds were borrowed for setting up a Multi-Product Special Economic Zone (SEZ) and the interest earned reduced the actual interest outgo. The assessee relied on the Supreme Court's decision in CIT vs. Bokaro Steel Ltd and the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd vs. ITO. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, applying the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd vs. CIT, which held that interest earned on borrowed capital deposited in fixed deposits should be taxed under "income from other sources."

2. Netting off Interest Earned Against Interest Expenditure:
The assessee contended that the interest earned on fixed deposits should be netted off against the interest expenditure on borrowed funds, as there was a direct nexus between the borrowed funds and the deposits placed. The AO rejected this argument, stating that the interest expenditure had to be capitalized and could not be set off against income from other sources. The Tribunal, however, found merit in the assessee's argument, distinguishing the facts from earlier years and relying on the decision in Kamat Hotels (India) Ltd., where it was held that interest earned on temporarily idle funds, which are inextricably linked to the business, should be set off against pre-operative expenses.

3. Treatment of Interest Received During Pre-Construction Period:
The additional ground raised by the assessee was that the interest received during the pre-construction period should be treated as a capital receipt, reducing the capital expenditure, and not as "income from other sources." The Tribunal agreed with the assessee, noting that the funds were temporarily parked in fixed deposits and were not surplus funds. The Tribunal cited the Delhi High Court's decision in Indian Oil Panipat Power Consortium Ltd., which held that interest earned on funds inextricably linked to the setting up of a plant should be capitalized and set off against pre-operative expenses.

Tribunal's Conclusion:
The Tribunal distinguished the facts of the case from earlier years and relied on the decision in Kamat Hotels (India) Ltd., directing the AO to allow the netting off of the interest income against interest expenditure. The Tribunal concluded that the interest earned on temporarily idle funds, which were inextricably linked to the business, should be treated as a capital receipt and set off against pre-operative expenses. Consequently, the assessee's additional ground of appeal was allowed, and the original grounds did not require further adjudication.

Final Judgment:
The appeals of the assessee were partly allowed, with the Tribunal directing the AO to allow the netting off of interest income against interest expenditure, treating the interest earned during the pre-construction period as a capital receipt. The order was pronounced on June 9, 2020, considering the delay due to the COVID-19 national lockdown.

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