2018 (4) TMI 1999 - AT - Income Tax

Set off of interest paid against interest earned - Whether interest income has to be assessed under the head Income from other sources ? - whether the assessee is entitled to reduce the work-in-progress to the extent of the net interest by treating it as business income? HELD THAT - In the case of Bokaro Steels Ltd 1998 (12) TMI 4 - SUPREME COURT held that when the activities of the assessee in connection with a receipt is directly connected with or incidental to the business, such receipts be allowed to be adjusted against the work-in-progress and are capital receipts and not income of the assessee from an independent source. Here, in this matter, the very purpose of assessee receiving Rs. 157 crores from RINL was to increase the paid up share capital in furtherance of their business and such an amount accrued interest during the period of their study for acquiring coal mines, during which period on day to day basis the assessee incurred an expenditure. Assessee is entitled to net of the interest paid against the interest received and the balance to reduce the work-in-progress. The interest received in this matter is not taxable under the head Income from other sources . Accordingly, the grounds of appeal are allowed and the learned AO is directed to delete the addition made on account of the interest earned. Assessee appeal allowed.

Summary

Issues:
Whether interest earned by the assessee is taxable under the head "Income from other sources" or can be set off against expenses during construction/CWIP.

Analysis:
The assessee, a public sector undertaking, received funds for acquiring coal mines and incurred expenses during the preparation phase. The Assessing Officer (AO) noticed a difference in interest earned and interest paid, bringing a sum to tax. The assessee contended that the interest earned should be set off against expenses and not taxed separately. However, the Commissioner of Income-tax (Appeals) held that the interest income should be assessed separately under "Income from other sources." The assessee appealed this decision.

The argument presented was that the interest earned by the assessee, being a public sector undertaking, would ultimately benefit the government. The interest accrued on funds held in FD for acquiring coal mines was directly linked to the business purpose. The assessee relied on the precedent set by the Supreme Court in the case of CIT vs Bokaro Steels Ltd. (1999) 236 ITR 315, which allowed netting of interest against work-in-progress. The Department, on the other hand, supported the decisions of the lower authorities.

Upon reviewing the facts and arguments, it was established that the funds received were for business purposes, specifically to increase share capital for acquiring coal mines. The interest earned during this period was connected to the business activities of the assessee. Citing the case of Bokaro Steels Ltd., the Tribunal held that such receipts directly related to business could be adjusted against work-in-progress and were capital receipts, not independent income.

Despite the various decisions cited by the assessee, the Tribunal, in line with the Supreme Court ruling in Bokaro Steels Ltd., concluded that the interest earned could be set off against interest paid, reducing the work-in-progress balance. Consequently, the interest received was not taxable under "Income from other sources," and the addition made by the AO was directed to be deleted. The appeal of the assessee was allowed, and the order was pronounced on 6th April 2018.