2014 (3) TMI 66 - AT - Income Tax

Capitalization of interest income after set off with interest expense - Income earned from other sources Held that - Assessee had to incur interest expenses on the loan taken from the bank - It was capitalized and the AO has accepted the same - The interest which was received on the fixed deposits was deducted from the capital work in progress of the assessee - fixed deposit was placed as margin in the bank - Relying upon Tuticorn Alkali Chemicals & Fertilizers Limited vs. CIT 1997 (7) TMI 4 - SUPREME Court - the present case is not one where the assessee has made the deposit of surplus funds lying idle with an intention to earn the interest - On the contrary the amount of interest was earned from fixed deposit which was kept in the bank and marked as lien for furnishing the bank guarantees - Thus, it had an inextricable nexus with securing the contract - the assessee was justified in adjusting the interest earned from the interest payments on term loan and the balance of interest paid was capitalized in the books thus, there is no infirmity in the order of the CIT(A) in directing that the addition made by the AO under the head income from other sources was to be deleted Decided against Revenue.

Summary

Issues:
1. Addition of interest income earned from term deposits as income from other sources.

Analysis:

Issue 1:
The primary issue in this case revolves around the treatment of interest income earned from term deposits by the assessee company engaged in real estate business. The Assessing Officer (AO) contended that the interest income should be taxed as income from other sources, as it was not directly related to the main business activities of the company. The AO relied on the decision of the Hon'ble Apex Court in Tuticorn Alkali Chemicals and Fertilizers Limited vs. CIT (1997) to support this stance. The AO argued that the interest earned on the fixed deposits did not have a direct nexus with the bank loan taken by the company for business purposes.

Upon appeal, the Commissioner of Income Tax (Appeals) noted the submissions of the assessee, highlighting that the interest income was earned on fixed deposits maintained as margin money for bank guarantees required in the course of business operations. The assessee argued that the interest earned was not from surplus funds but was intricately linked to the project requirements. The CIT(A) accepted the assessee's contentions and held that the interest income should not be taxed as income from other sources. The CIT(A) emphasized the specific circumstances of the case, where the interest earned had a direct connection with securing contracts and fulfilling obligations related to the business activities.

In its final judgment, the Appellate Tribunal upheld the CIT(A)'s decision, emphasizing that the interest income earned from fixed deposits had a clear nexus with the business operations of the assessee company. The Tribunal differentiated the facts of this case from the precedent cited by the AO, Tuticorn Alkali Chemicals and Fertilizers Limited case, by highlighting the specific purpose of the fixed deposits in securing bank guarantees for business transactions. The Tribunal concurred with the CIT(A) that the interest income should not be treated as income from other sources, ultimately dismissing the Revenue's appeal.

In conclusion, the judgment focused on the crucial aspect of the direct relationship between the interest income earned from term deposits and the business activities of the assessee company. The decision highlighted the specific circumstances under which the interest income was generated and the essential purpose it served in the context of the company's operations, ultimately leading to the dismissal of the Revenue's appeal.