2018 (2) TMI 425 - AT - Income Tax

Interest earned on investment out of funds borrowed from Bank - income from other sources - set off of interest income from the project cost as development expenditure account - Held that - This issue is squarely covered in favour of the assessee by the decisions of the Hon ble Supreme Court in the cases of Bokaro Steel Limited (1998 (12) TMI 4 - SUPREME Court) and Karnal Cooperative Sugar Mills Limited (1999 (4) TMI 7 - SUPREME Court) as rightly held by the ld. CIT(Appeals). Assessee clearly show that the investment out of funds borrowed from Bank was temporarily made by the assessee to reduce the interest cost and since such utilization was directly linked with the activity of construction of Mall-cum-Shopping Complex, which formed the capital structure of the assessee-company, the interest earned on investment was viewed as capital receipts, which was going to reduce the cost of construction - if the said interest income was to be held as liable to tax in the hands of the assessee under the head income from other sources , the assessee was entitled for deduction on account of interest paid to Allahabad Bank on the borrowed funds under section 57(iii) as held in the case of Karnal Cooperative Sugar Mills Limited (supra) and such interest payment being more than the interest earned in both the years under consideration, no addition was liable to be made to the total income of the assessee on this issue. We, therefore, find no infirmity in the order of the ld. CIT(Appeals) giving relief to the assessee - Decided against revenue

Summary

Issues:
- Whether the interest income earned by the assessee on the investment made out of a loan taken from a bank is taxable as income from other sources.
- Whether the interest income should be treated as capital receipts reducing the cost of construction.

Analysis:
1. Issue 1 - Taxability of Interest Income:
- The assessee, a company, obtained a term loan for constructing a Mall-cum-Shopping Complex. The Assessing Officer treated the interest income earned on investments made from the loan as taxable under the head "income from other sources." The assessee relied on judgments of the Hon'ble Supreme Court in support of deducting the interest paid to the bank on the loan under section 57(iii) of the Act.
- The ld. CIT(Appeals) deleted the addition of interest income for both assessment years based on the decisions in the cases of Karnal Cooperative Sugar Mills Limited and Bokaro Steel Limited. The interest earned was viewed as capital receipts linked to the construction activity, reducing the cost of construction.
- The Tribunal upheld the ld. CIT(Appeals)'s decision, stating that the interest earned was capital receipts related to the construction project. Even if considered taxable, the interest paid to the bank exceeded the interest earned, resulting in no addition to the total income of the assessee.

2. Issue 2 - Treatment of Interest Income as Capital Receipts:
- The Tribunal found that the investment of borrowed funds by the assessee was directly linked to the construction activity, making the interest earned on investments a capital receipt. This was in line with the decisions in the cases of Bokaro Steel Limited and Karnal Cooperative Sugar Mills Limited.
- The Tribunal dismissed the Revenue's appeals, affirming that the interest income should be treated as capital receipts reducing the cost of construction. The relief granted by the ld. CIT(Appeals) to the assessee was upheld for both assessment years.

In conclusion, the Tribunal dismissed the Revenue's appeals, ruling in favor of the assessee regarding the taxability of interest income and treating it as capital receipts linked to the construction project, in accordance with relevant legal precedents.