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2019 (7) TMI 1490 - AT - Income TaxCharacterization of income - interest earned on ICDs - Income from other sources or business income - assessee is not in money lending business - HELD THAT - There is no dispute that the assessee has parked surplus business funds, which is not immediately required for utilization in business, in short term deposits with bank or IDCs. The entire purpose of such deposits was not to keep the funds idle and earn some income. If the aforesaid reasoning of the assessee is valid for the interest earned on fixed deposits, the same cannot be invalid or unacceptable in case of interest earned on ICDs. When it is accepted that the assessee has taken a prudent business decision to earn some income by utilizing the idle business funds, no differentiation can be made between the investments made in banks and ICDs. In view of the aforesaid, we hold that the interest income earned on ICDs should be treated as income from business. This ground is allowed. Disallowing expenditure incurred for earning interest and other income - CIT (A) has disallowed interest expenditure on borrowed fund is, it is not directly related to the interest income earned on ICDs - HELD THAT - It is a fact on record that the assessee had borrowed the funds for development of the SEZ project. Therefore, the interest on such borrowed funds is allowable as business expenditure. It is also relevant to observe, learned CIT (A) has accepted that the assessee had mixed funds. On a careful perusal of the order of learned CIT (A), it is also noticed that he has completely overlooked assessee s main claim that the interest expenditure should be allowed as business expenditure. When there is no dispute that the borrowed funds were utilized for the purpose of business, the interest expenditure on such borrowed funds has to be allowed as business expenditure. In any case of the matter, since while deciding ground no.1, we have held that the interest earned on ICDs is to be treated as business income of the assessee, logically, the interest expenditure has to be allowed. Accordingly, the ground raised is allowed. Alternative claim of deduction under section 57(iii) of the Act in respect of interest expenditure - HELD THAT - While deciding grounds no.1 and 3, of assessee s appeal, we have held that interest earned on ICDs are to be treated as income from business. Consequently, the interest expenditure claimed by the assessee has to be allowed. Therefore, the alternative claim of deduction u/s 57(iii) becomes redundant. Suffice it to say, assessee s claim of deduction u/s 57(iii) in respect of interest expenditure has been allowed by learned CIT (A) in assessment years 2009 10 and 2010 11 and the issue has attained finality as neither the assessee nor the Revenue has contested the order of learned CIT (A). Therefore, even otherwise also, assessee s claim of deduction u/s 57(iii) is allowable. Disallowance u/s 14A r/w rule 8D - no exempt income - HELD THAT - The factual position which emerges is, in the year under consideration the assessee has not earned any exempt. That being the case, as per settled principle of law, no disallowance u/s 14A r/w rule 8D can be made. In this context, we may refer to the decision of PCIT v/s Rivian International Pvt. Ltd. 2017 (12) TMI 811 - BOMBAY HIGH COURT . In view of the aforesaid, we delete the disallowance made by the Assessing Officer and sustained by learned CIT (A). This ground is allowed. Disallowing differential interest - proof of commencement of business - admission of additional ground - reference to the provisions of section 40A(2)(b) - advance given to the sister concern - HELD THAT - CIT(A) has held that assessee s business has commenced from the assessment year 2003 04. Therefore, when assessee s business has already commenced, there is no question of allowing or disallowing capitalization of interest expenditure. Undisputedly, the assessee has debited the interest expenditure to the Profit Loss account. Therefore, such expenditure has to be set off against the business income. As regards the submission of the learned DR that the AO has applied section 40A(2)(b), we do not find such submission to be factually correct. Neither the AO nor learned CIT(A) has made any reference to the provisions of section 40A(2)(b). On the contrary, the Departmental Authorities have simply disallowed capitalization of the interest expenditure. In view of the aforesaid, assessee s claim is allowed. Additional ground is allowed.
Issues Involved:
1. Treatment of interest earned on inter-corporate deposits (ICDs) as business income or income from other sources. 2. Disallowance of expenditure incurred for earning interest and other income. 3. Disallowance under section 14A read with Rule 8D. 4. Differential interest disallowance. 5. Commencement of business operations. Issue-wise Detailed Analysis: 1. Treatment of Interest Earned on ICDs: The assessee challenged the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] in holding that interest earned on ICDs should be treated as income from other sources. The assessee argued that surplus funds were invested in short-term deposits and ICDs to avoid keeping them idle, thus the interest earned should be treated as business income. The Tribunal noted that the CIT(A) had accepted the assessee's claim of business commencement and treated interest on fixed deposits as business income but rejected the same for ICDs. The Tribunal found this reasoning illogical, stating that if the interest on fixed deposits is treated as business income, the same should apply to ICDs. Therefore, the Tribunal held that the interest income earned on ICDs should be treated as business income. 2. Disallowance of Expenditure for Earning Interest and Other Income: The assessee contested the disallowance of expenditures incurred for earning interest income. The CIT(A) had allowed some expenditures related to SEZ development but disallowed those related to earning interest income, stating they were not wholly and exclusively incurred for earning the income under section 57. The Tribunal observed that since the CIT(A) accepted the business commencement, the interest expenditure on borrowed funds should be allowed as business expenditure. The Tribunal allowed the interest expenditure as business expenditure, noting that the borrowed funds were utilized for business purposes. 3. Disallowance under Section 14A read with Rule 8D: The assessee argued that no exempt income was earned during the year, hence no disallowance under section 14A read with Rule 8D should be made. The Tribunal considered the submissions and material on record, confirming that no exempt income was earned. Citing the decision of the Hon'ble Jurisdictional High Court in PCIT v/s Rivian International Pvt. Ltd., the Tribunal deleted the disallowance made by the Assessing Officer and sustained by the CIT(A). 4. Differential Interest Disallowance: The assessee raised an additional ground regarding the differential interest disallowance of ?44,23,836. The Assessing Officer had disallowed the capitalization of the differential interest rate, stating it should be reduced from work-in-progress. The Tribunal noted that since the CIT(A) accepted the business commencement, the interest expenditure debited to the Profit & Loss account should be allowed as business expenditure. The Tribunal found no reference to section 40A(2)(b) by the Departmental Authorities and allowed the assessee's claim. 5. Commencement of Business Operations: The Revenue appealed against the CIT(A)'s decision that the assessee's business had commenced. The Tribunal observed that the CIT(A) followed the Tribunal's decision for assessment year 2003-04, which held that the assessee's business had commenced. The Tribunal noted that the Revenue had accepted this decision for assessment year 2010-11 and found no infirmity in the CIT(A)'s order, thus dismissing the Revenue's appeal. Conclusion: The Tribunal allowed the assessee's appeals partly and dismissed the Revenue's appeal, confirming the commencement of business operations and treating the interest earned on ICDs as business income. The Tribunal also allowed the expenditure incurred for earning interest as business expenditure and deleted the disallowance under section 14A read with Rule 8D. The differential interest disallowance was also allowed in favor of the assessee.
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