2015 (7) TMI 356 - AT - Income Tax

Disallowance of the interest expenditure from being set off against the interest income offered under the head Income from other sources - whether the interest paid on the borrowings which were source of funds parked in term deposits has to allow as expenditure or not? - Held that - The interest earned by the assessee is assessable u/s 56 and only such expenditure can be allowed which has been set out in clauses (i) to (iii) in section 57. In that case it was not the case of the assessee that the interest payable by it on the term loans should be allowed as deduction u/s 57. Here also if the interest payable on the borrowed funds are directly relatable to setting up of the project, then perhaps the decision of the Ld. CIT(A) would be assailable, but here in this case, the assessee s claim is that interest expenditure was directly related to earning the interest income taxable under the head Income from other sources. Hence the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997 (7) TMI 4 - SUPREME Court) and other decisions as relied upon by the Ld. CIT(A) will not be applicable. In order to establish that such an interest expenditure was directly related to the interest income, the matter is being restored back to the file of the AO to verify the assessee s contention and to see, whether there is a direct nexus of the interest expenditure incurred to the interest income earned. If that is so, then AO will allow the interest expenditure or set off against such interest income, while doing so AO will give due and effective opportunity to the assessee to demonstrate its case before him. - Decided partly in favour of assessee for statistical purpose.

Summary

Issues:
- Setting off interest expenditure against interest income for A.Y. 2008-09
- Setting off interest expenditure against interest income for A.Y. 2009-10

Analysis - A.Y. 2008-09:
The Assessee challenged the Ld. CIT(A)'s decision not to set off interest expenditure against interest income. The Assessee, engaged in steel manufacturing, had interest income of Rs. 1,80,53,158 from term deposits, setting off Rs. 5,02,732 interest expenditure on borrowings directly linked to funds in deposits. The AO and Ld. CIT(A) disallowed this set off, citing legal precedents. The Ld. CIT(A) held that expenditure must be within Section 57 for deduction, which the Assessee failed to prove. The Supreme Court's decision in Tuticorin Alkali Chemicals case was relied upon. The Assessee argued that since interest income was already offered for taxation, related interest expenditure should be allowed.

Analysis - A.Y. 2009-10:
Similar to A.Y. 2008-09, the Assessee contested the disallowance of setting off Rs. 2,98,36,981 interest expenditure against Rs. 5,54,94,722 interest income. The decision from A.Y. 2008-09 was applied mutatis mutandis to this appeal. The Tribunal partially allowed both appeals for statistical purposes, directing the AO to verify the direct nexus of interest expenditure to interest income. The Assessee's contentions were to be examined, and if a direct link was established, the interest expenditure could be allowed or set off against the income.

In both cases, the Tribunal found merit in the Assessee's argument regarding the direct relationship between interest expenditure and interest income. The matter was remanded to the AO for further examination to determine if the interest expenditure was directly linked to the interest income earned. The Tribunal partially allowed the appeals for statistical purposes, emphasizing the need for a thorough verification of the relationship between the interest expenditure and income before making a final decision.