2021 (1) TMI 781 - AT - Income Tax

Taxability of interest income - Netting of interest expenditure - interest income received from the Fixed Deposit created out of the loan Fund received from NEDFI - AO noted that the assessee has claimed TDS credit in respect of interest income from banks but corresponding interest income is not shown while computing total income for the year under consideration - HELD THAT - The assessee received interest income from the said Fixed Deposits and at the same time the assessee had incurred the interest expenditure to NEDFI, which has been netted by the assessee in its computation/books and the net amount was capitalized and shown as work in progress (WIP) which action of assessee has not been accepted by the AO and the AO has taxed the interest income under the head other income and taxed it. According to Ld. Advocate since the assessee has commenced the project, the interest expenditure should be netted with that of the interest received and only the net amount should be brought to tax. CIT(A) has noted that the assessee has commenced its project (Tarun nagar Project) and since the interest amount from the fixed deposits are intrinsically linked to the business/project which has admittedly commenced, therefore the interest expenditure need to be allowed u/s 36(1)(iii) and in that event only the net amount can be taxed i.e. the interest received minus interest expenditure . Therefore, the impugned orders are set aside and it is directed that only the net interest amount should be taxed and it can only be brought to tax in accordance to law. Appeals of the assessee are partly allowed.

Summary

Issues:
1. Taxability of interest income received from fixed deposits.

Analysis:
The appeals were filed by the assessee against the orders of the Ld. CIT(A)- Guwahati for assessment years 2012-13 to 2014-15. The primary issue raised by the assessee was the taxability of interest income received from fixed deposits. The Ld. Advocate for the assessee clarified that only this issue was being contested, while other directions given by the Ld. CIT(A) were not pressed. The AO had observed that the assessee had not shown interest income from fixed deposits in the total income computation. The AO taxed the interest income, leading to the appeal. The Ld. CIT(A) upheld the AO's decision, stating that the interest income was required to be taxed as the business had commenced, and there was no link between the interest income and the interest claimed. The Ld. CIT(A) dismissed the grounds of appeal raised by the assessee.

The assessee contended that the interest income was linked to the project that had commenced, and the interest expenditure should be netted against the interest received before taxing the net amount. The Ld. Advocate argued that due to local disputes, the project had stalled, leading to recurring borrowing costs. The assessee had deposited the loan amount in banks, generating interest income, while also incurring interest expenses to NEDFI. The net amount was capitalized as work in progress. The Ld. CIT(A) agreed that since the project had started, the interest expenditure should be allowed under section 36(1)(iii) of the Income Tax Act, and only the net interest amount should be taxed. Consequently, the impugned orders were set aside, directing that only the net interest amount should be taxed in accordance with the law.

In conclusion, the appeals were partly allowed, with the decision on the taxability of interest income from fixed deposits favoring the assessee. The judgment emphasized the need to consider the link between interest income and project commencement before taxing the net amount. The order was pronounced on 15th January 2021 by the Appellate Tribunal ITAT Guwahati.