2021 (2) TMI 1383 - AT - Income Tax

Denial of claim for deduction towards interest payable on borrowed funds while computing the taxable interest income earned by the assessee on the fixed deposits made from borrowed funds - HELD THAT - The facts in the case of the assessee are that it has borrowed funds from the bank for the purpose of its business. Since the entire funds could not be utilised during the relevant AYs the same were placed in bank deposit in order to cut down the interest expenditure incurred towards the borrowed funds. Provisions of section 57(iii) of the Act clearly lays down that while computing the income chargeable under the head income from other source , any expenditure other than capital expenditure expended wholly and exclusively for the purpose of earning such income shall be allowable as deduction. Therefore, when the unutilised borrowed interest-bearing funds are parked in the bank as fixed deposit the corresponding interest expenditure incurred shall be allowable as deduction by virtue of section 57(iii) - Hence, we hereby direct the Ld. AO to verify whether the assessee has parked the unutilised borrowed funds in the bank account as fixed deposit and if so, grant deduction in accordance with section 57(iii) of the Act. Assessee has deposited its surplus funds arising out of its business with the bank as fixed deposit then there is no interest cost attributable to the same - No deduction can be granted towards interest earned on such deposits because no such interest expenditure is incurred on the funds deposited with the bank. Therefore, we remit the matter back to the file of the AO to verify whether the interest earned on FDs with the bank aggregating are arising out of interest-bearing funds or out of surplus funds and thereafter decide the matter in accordance with the observations made by us herein above.

Summary

Issues:
1. Denial of deduction towards interest payable on borrowed funds while computing taxable interest income earned from fixed deposits.
2. Disallowance of deduction towards interest payable against interest earned on short-term deposits made from surplus funds.

Analysis:
Issue 1:
The assessee filed appeals against the orders of the Ld. CIT (A) for the assessment years 2012-13 and 2013-14, challenging the denial of deduction towards interest payable on borrowed funds when calculating taxable interest income from fixed deposits. The crux of the issue was the disagreement with the Ld. CIT (A) and Ld. AO's decision. The ITAT Hyderabad held that the provisions of section 57(iii) of the Act allow for the deduction of expenditure wholly and exclusively incurred for earning income from other sources. The ITAT found that if unutilized borrowed funds are deposited in a bank account as fixed deposits, the corresponding interest expenditure is allowable as a deduction. Therefore, the ITAT directed the Ld. AO to verify if the assessee had parked unutilized borrowed funds in a bank account as fixed deposits and grant deduction accordingly.

Issue 2:
Regarding the second concise ground of the appeal for the assessment year 2013-14, the ITAT noted that if the assessee had deposited surplus funds from its business as fixed deposits, no interest cost would be attributable to them. In such a scenario, no deduction could be granted towards interest earned on those deposits since no interest expenditure was incurred on the funds deposited with the bank. The ITAT remitted the matter back to the Ld. AO to verify if the interest earned on fixed deposits with the bank arose from interest-bearing funds or surplus funds and to decide accordingly. Ultimately, both appeals of the assessee were allowed for statistical purposes, indicating a favorable outcome for the assessee.

In conclusion, the ITAT's judgment clarified the application of deduction rules concerning interest payable on borrowed funds and interest earned on deposits made from surplus funds, providing a detailed analysis and directing the Ld. AO to verify specific aspects before making a decision.