2005 (2) TMI 442 - AT - Income Tax

Income From Other Sources - interest income earned during the pre-operative period - deductible u/s 57(iii) - HELD THAT - Since consolidated details of expenses have been maintained, apportionment has been done by the assessee on pro-rata basis. It is seen that the assessee-company has also taken into account the various administrative expenses. On estimate basis, the assessee-company has apportioned these administrative expenses as pertaining to earning of interest income. In our view, all administrative expenses have been primarily incurred for the purpose of the assessee's business and the assessee-company is not required to incur such administrative expenses for earning interest income, which flows from the term deposits made with the banks. Therefore, in our view, the administrative expenses or part thereof cannot be allowed u/s 57(iii). Only interest expenditure is required to be apportioned to the investment which are yielding interest income to the assessee. The Assessing Officer is, therefore, directed to work out the quantum of interest expenditure, which is allowable u/s 57(iii) on pro-rata basis as per the details already made available by the assessee and reproduced by the ld. CIT(A) in his order, in respect of all the three assessment years. Opportunity shall be allowed to the assessee. In the result, while the appeals are allowed.

Issues Involved:
1. Deductibility of expenditure against gross interest income under section 57(iii) of the Income-tax Act.
2. Inclusion of additional tax levied under section 143(1A) in the demand raised.
3. Levy of interest under sections 234B and 234C.

Detailed Analysis:

1. Deductibility of Expenditure Against Gross Interest Income Under Section 57(iii):

The primary issue in these appeals was whether the assessee could deduct expenditure, including interest on borrowed funds, from the gross interest income earned during the pre-operative period under section 57(iii) of the Income-tax Act. The assessee-company, which was in the process of setting up a project, had invested surplus funds in term deposits, earning interest income. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] had previously disallowed the deduction of such expenditure, citing the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT.

The ITAT had earlier remitted the matter back to the AO to verify the extent of expenditure incurred for earning the interest income. The AO, however, rejected the claim without verifying the details, stating that the funds were raised for project construction and not for earning interest income.

The assessee argued that the Revenue authorities exceeded their jurisdiction by entirely disallowing the claim without considering the factual position. The assessee provided detailed pro-rata allocation of the cost of borrowings and administrative expenses, arguing that the principle of apportionment of expenses between various sources of income is well established in law, citing the Supreme Court decision in Continental Construction Ltd. v. CIT and the Gujarat High Court judgment in H.K. (Investment) Co. (P.) Ltd. v. CIT.

The Revenue, represented by the DR, contended that the borrowed funds were intended for project construction, not for earning interest income, and thus, the expenditure could not be said to be laid out wholly and exclusively for earning such income. The DR relied on several judgments, including Siddho Mal & Sons v. CIT and CIT v. Globe Theatres (P.) Ltd., to support this view.

The Tribunal concluded that the principle of apportionment of expenditure allowable under section 57(iii) was inherent in its earlier order and directed the AO to verify the details provided by the assessee to ascertain the quantum of expenditure referable to the loan on which interest income was earned. The Tribunal emphasized that administrative expenses should not be allowed under section 57(iii) as they were primarily incurred for the business purpose, not for earning interest income. The AO was directed to work out the quantum of interest expenditure allowable under section 57(iii) on a pro-rata basis.

2. Inclusion of Additional Tax Levied Under Section 143(1A):

In ITA No. 2986 for the assessment year 1993-94, the assessee raised a ground regarding the inclusion of additional tax of Rs. 3,83,673/- levied under section 143(1A) in the demand raised. The Tribunal found that this ground was not raised before the CIT(A) and, therefore, did not arise from the orders of the Revenue authorities. Consequently, this ground was rejected.

3. Levy of Interest Under Sections 234B and 234C:

The last ground of appeal, common for all three assessment years, pertained to the levy of interest under sections 234B and 234C. This ground was admitted to be consequential, and the AO was directed to recalculate the interest chargeable under these sections while giving effect to the Tribunal's order.

Conclusion:

- The appeals in ITA Nos. 2984 and 2985 were allowed, directing the AO to apportion the interest expenditure on a pro-rata basis under section 57(iii).
- The appeal in ITA No. 2986 was partly allowed, rejecting the ground related to additional tax under section 143(1A) but directing recalculation of interest under sections 234B and 234C.

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