2024 (2) TMI 1532 - HC - Income Tax

Disallowance of interest expenses as the assessee had not started its business activities - ITAT deleted addition - HELD THAT - ITAT s decision to allow the deduction of interest expenses u/s 57(iii) was upheld based on the direct nexus between the borrowed funds and the interest income earned by the assessee. No justification to interfere with the view taken by the ITAT. The appeal raises no substantial question of law.

Summary

The Income Tax Department appealed the order of the Income Tax Appellate Tribunal (ITAT) dated 23 November 2017, raising questions regarding the disallowance of interest expenses by the Assessing Officer. The key issues presented for consideration were whether the ITAT was justified in deleting the disallowance of interest expenses when the assessee had not commenced its business activities, and whether the ITAT erred in not considering the decision of the Supreme Court in Tuticorin Alkai Chemicals & Fertilizers Ltd. vs CIT. The ITAT found that the assessee had borrowed funds and advanced them to others, earning interest in the process. The Department argued that the expenses should be capitalized as they were incurred before the business activities commenced. However, the ITAT distinguished the facts of the present case from the Tuticorin Alkai Chemicals case, where funds were used for setting up factories. The ITAT held that the interest expenses were allowable under Section 57(iii) of the Income Tax Act, as they were incurred wholly and exclusively for earning interest income.The ITAT considered the decision in Vodafone South Ltd. vs. CIT and held that there was a direct nexus between the interest earned on loans advanced by the assessee and the interest paid on borrowed funds. Therefore, the interest expenses were rightly claimed under Section 57(iii). The ITAT dismissed the appeal, concluding that there was no substantial question of law to interfere with its decision.In summary, the ITAT's decision to allow the deduction of interest expenses under Section 57(iii) was upheld, based on the direct nexus between the borrowed funds and the interest income earned by the assessee. The appeal by the Income Tax Department was dismissed as it raised no substantial question of law.