2019 (12) TMI 257 - AT - Income Tax

Appropriate head for taxability of income - interest on short term deposits made from borrowings - interest on deposits placed as margin money for letter of credit and bank guarantee - assessable under the head income from other sources or not - HELD THAT - In the case of Autokast Ltd., supra, it was observed that the interest income on money borrowed for purchase of plant and machinery and placed in short term deposit in bank till payment was made and used in bill discounting was taxable as income from other sources . Deduction of interest - case of assessee is that the interest paid on borrowings should be deducted as an expenditure U/s.57 from the interest income as it was incurred wholly for earning such interest income - HELD THAT - There are merits in the grounds raised by the assessee - the issue is remanded back to the Assessing Officer to verify and assess the net interest income. The appeal of the assessee is treated as partly allowed for statistical purpose.

Summary

Issues:
Assessment of interest income under Section 56, applicability of decisions cited by the assessee, treatment of interest on short term deposits, deduction of interest paid on borrowings under Section 57.

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the assessment year 2013-14. The Assessing Officer added interest income earned by the assessee on margin money kept in deposits against the letter of credit under Section 56. The assessee argued that the interest was related to setting up the industry and should be reduced from interest expenditure. The CIT(A) upheld the AO's decision, stating that the decisions relied on by the assessee were not applicable. The ITAT Chennai observed that interest income on borrowed money for plant and machinery, placed in short term deposits, was taxable as 'income from other sources'. The ITAT also emphasized that accounting practice cannot override statutory provisions. The ITAT found merit in the assessee's plea that interest paid on borrowings should be deducted as an expenditure under Section 57 from interest income.

The ITAT remitted the issue back to the Assessing Officer to verify and assess the net interest income. The assessee was directed to provide all necessary materials and comply with the AO's requirements. The AO was instructed to conduct a proper inquiry, provide opportunities for the assessee to present clarifications, and pass an order in accordance with the law. The ITAT partly allowed the appeal for statistical purposes. The order was pronounced on 8th November 2019 in Chennai.