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2022 (11) TMI 845 - AT - Income TaxDeduction of interest expenditure u/s 57 against the interest income earned from fixed deposits prior to commencement of business - assessee in its Cross Objection pleads in alternate for treating the interest income as capital receipt which would reduce the cost of the qualifying assets - HELD THAT - The activity of earning income should be directly connected with or be incidental to the primary activity for which borrowing was made. If the transactions involving activities of earning income and incurring expenditure are not even distantly related to each other, then deduction u/s 57(iii) fails. We are confronted with a situation in which the borrowing was made for developing highway. FDRs were purchased for utilization of idle funds. Such FDRs were not required to be made as a condition precedent for having letter of credit or furnishing of guarantee for doing any activity connected with the highway development. In such circumstances, it becomes glaring that the proportionate interest expenditure on borrowing for highway development has no relation with the making of FDRs on which the interest income chargeable to tax under the head Income from other sources was earned. As decided in UNITED WIRE ROPES LTD. 1978 (7) TMI 40 - BOMBAY HIGH COURT the interest paid on loan could not be set off under s. 57(iii) against interest earned on deposits, in the absence of any evidence that the two transactions were so integrated as to be regarded a single composite transaction. In the hue of the above discussion and the binding precedent, we hold that the ld. CIT(A) was not justified in allowing deduction of proportionate interest on borrowing u/s 57(iii) against the interest income earned on FDRs, which was offered by the assessee as chargeable to tax u/s 56 of the Act. The impugned order is overturned on this score. Cross objection that the interest income earned on FDRs is a capital receipt not chargeable to tax which would reduce the highway development costs including the interest expenditure etc. - distinction between the cases in which the transaction resulting into income is connected with the other activity for which capital was borrowed on which interest is paid - HELD THAT - We are not convinced with the alternate submission of the assessee. It cannot be said that no income chargeable to tax can be earned simply because the business has not commenced. The receipt of interest on FDRs has no relation whatsoever with the business of the assessee much less with the improvement of State Highway and both the transactions are independent of each other. Having held that the assessee is not entitled to set off of interest paid amounting to Rs.6.82 crore against the interest income, and further that interest income of Rs.4.91 crore is chargeable to tax separately, the logical consequence of this is that the interest cost of Rs.6.82 crore would go to increase the amount of capital work-in-progress in the same way as has been the interest paid on bank borrowings not used for purchasing FDRs. To clarify, if, for example, an assessee borrows a sum of Rs.100/- for construction on which interest of Rs.10/- is incurred. Further suppose a sum of Rs.80/- out of such borrowing is utilised for making FDRs which is unconnected with the construction. Total interest of Rs.10/- payable by the assessee on the borrowings is liable to be capitalised. Proceeding with the hypothetical example, the assessee capitalized Rs.2 and claimed deduction of Rs.8 against the interest income. Once it is held that Rs.8 cannot be allowed deduction against interest income, then such interest of Rs.8 will also get the same treatment of capitalization as has been given to Rs.2. In other words, the entire interest of Rs.10 on borrowing will be capitalized. We order accordingly. Addition made by the AO u/s.56(2)(viib) by accepting the value of shares as fair market value (FMV) - assessee, has determined the FMV on the basis of Discounted Cash Flow method, which is one of the accepted methods of valuation of shares - HELD THAT - The Hon ble High Court in VODAFONE M-PESA LIMITED 2018 (3) TMI 530 - BOMBAY HIGH COURT ruling in favour of the assessee held that the AO is undoubtedly entitled to scrutinize the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the Discounted Cash Flow method and it is not open to him to change the method of valuation which has been opted for by the assessee Adverting to the facts of the instant case, it is seen that the assessee adopted the DCF method and determined the valuation of share at Rs.2,412/-. As against that the shares were issued only at premium of Rs.1,990/-. Since the AO has not found out any flaw in the calculation done by the IDFC Capital Limited under DCF method, the same has to be accepted. We, therefore, affirm the view taken by the ld. CIT(A) on this score.
Issues Involved:
1. Delay in filing cross objections by the assessee. 2. Deduction of interest expenditure under section 57(iii) against interest income from fixed deposits. 3. Treatment of interest income as capital receipt. 4. Deletion of addition under section 56(2)(viib) regarding the fair market value of shares. Issue-wise Detailed Analysis: 1. Delay in Filing Cross Objections by the Assessee: The assessee filed cross objections with a delay of 322 days, attributing the delay to the Covid-19 pandemic. The Tribunal condoned the delay based on the Supreme Court's judgments in Cognizance for Extension of Limitation, In re 438 ITR 296 (SC) and related cases, thus admitting the cross objections for disposal on merits. 2. Deduction of Interest Expenditure Under Section 57(iii) Against Interest Income from Fixed Deposits: The Revenue contested the deduction of Rs.6,82,57,053/- claimed by the assessee under section 57(iii) against interest income from fixed deposits. The Tribunal noted that the funds were borrowed for the development of the Sion Panvel State Highway, and the interest paid on these borrowings was not incurred for earning the interest income from fixed deposits. The Tribunal relied on the jurisdictional High Court's decision in CIT Vs. United Wire Ropes Ltd. (1980) 121 ITR 762 (Bom.), which held that interest paid on loans could not be set off against interest earned on deposits if the transactions were not integrated. Consequently, the Tribunal overturned the CIT(A)'s decision allowing the deduction. 3. Treatment of Interest Income as Capital Receipt: The assessee argued that the interest income earned on FDRs should be treated as a capital receipt, reducing the cost of the qualifying assets. The Tribunal rejected this argument, referencing the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs. CIT (1997) 227 ITR 172 (SC), which held that interest income earned on short-term deposits is chargeable under section 56 as "Income from other sources." The Tribunal distinguished this case from CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC), where interest income was directly connected with the construction activity. The Tribunal concluded that the interest income from FDRs was not connected to the highway development activity and thus should be taxed under "Income from other sources." 4. Deletion of Addition Under Section 56(2)(viib) Regarding the Fair Market Value of Shares: The Revenue challenged the deletion of an addition of Rs.3,74,11,321/- made under section 56(2)(viib) by the AO, who computed the FMV of shares at Rs.1938.29 per share, whereas the assessee issued shares at a premium of Rs.1,990/-. The assessee valued the shares using the Discounted Cash Flow (DCF) method, resulting in an FMV of Rs.2,412/- per share. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not find any flaws in the DCF valuation method used by the assessee. The Tribunal referred to the jurisdictional High Court's decision in Vodafone M-Pesa Limited Vs. PCIT (2018) 256 Taxman 240 (Bom.), which supported the use of the DCF method for share valuation. Conclusion: - The delay in filing cross objections was condoned. - The deduction of interest expenditure under section 57(iii) was disallowed. - The interest income from FDRs was held to be taxable under "Income from other sources" and not as a capital receipt. - The deletion of the addition under section 56(2)(viib) was upheld, affirming the use of the DCF method for determining the FMV of shares.
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