2015 (2) TMI 531 - AT - Income Tax

Interest income from temporary advancement of funds - income from Other Sources OR Profits & Gains of Business or Profession - business activity had not yet started - Held that - CIT(A) correctly concluded that though the borrowing was made for the purpose of business but the amount was advanced and interest earned for the period prior to commencement of business in the instant case and hence interest paid by assessee cannot be allowed as business expenditure. Decision of the Apex Court in the case of Tuticorin Alkalies Chemicals & Fertilizers Ltd. 1997 (7) TMI 4 - SUPREME Court and observed, on identical facts, that the interest received by the assessee cannot be treated as income from business and it has to be treated as income from other sources. Similarly the interest expenditure has to be capitalised. - Decided against assessee.

Summary

Issues:
1. Treatment of interest income from temporary advancement of funds
2. Capitalization of interest paid as normal business expenditure
3. Deduction of interest paid on borrowed funds advanced as loans

Analysis:

Issue 1: Treatment of interest income from temporary advancement of funds
The assessee contended that the interest income earned from temporary advancement of funds should be treated as income from business. The Assessing Officer (AO) observed that the interest earned is chargeable under section 56 of the Income Tax Act and only expenditure falling under section 57 is deductible against such interest receipt. The AO determined the total income at a specific amount. The assessee appealed before the CIT(A), arguing that the interest income should be considered as income from business. However, the CIT(A) referred to the proviso to section 36(1)(iii) which states that interest paid in respect of capital borrowed for acquisition of an asset before the asset is put to use cannot be allowed as a deduction. The CIT(A) concluded that the interest expenditure was correctly treated as capital in nature, affirming the AO's decision.

Issue 2: Capitalization of interest paid as normal business expenditure
The assessee further contended that the interest paid should be treated as normal business expenditure under section 36 of the Act. The CIT(A) highlighted that the proviso to section 36(1)(iii) prohibits the deduction of interest paid in respect of capital borrowed for an asset until the asset is put to use. The CIT(A) concluded that the interest paid by the assessee cannot be allowed as business expenditure as it was advanced and interest earned before the commencement of business activities.

Issue 3: Deduction of interest paid on borrowed funds advanced as loans
The assessee also prayed for the deduction of interest paid on borrowed funds to the extent they were advanced as loans, the interest on which was assessed as income from other sources. The Tribunal noted that the business activity of the assessee had not commenced until a specific date when advance for property was made. The Tribunal upheld the CIT(A)'s decision, stating that the interest paid by the assessee cannot be treated as business expenditure and must be considered capital in nature.

In conclusion, the Tribunal upheld the CIT(A)'s order, dismissing the appeal filed by the assessee. The decision was based on the proviso to section 36(1)(iii) and the timing of the commencement of business activities, determining that the interest income and expenditure should be treated as capital and not allowable as business expenditure.