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2023 (12) TMI 624 - AT - Income TaxNetting of interest income - Interest Income earned from the Investment made in the sister concern - real income concept - Earning of interest income out of borrowed funds - nexus as established between Interest paid and Interest earned - assessee that assessee follows Project Completion Method for recognition of revenue and has not recognized any revenue for taxation during the year - HELD THAT - As in the present case the question is not whether the Interest Income is to be taxed Under the Head Income from Other Sources or Income from Business and Profession - The fundamental question is of netting off. In the earlier paragraphs we have elaborately discussed and observed that the Interest Earned by the assessee has direct nexus to the Interest paid by the assessee. Once this fact is established that the Interest earned have Direct Nexus to Interest Paid, then applying the concept of Real Income and applying the proposition of law laid down by Hon ble Delhi High Court Triumph Reality Pvt. Ltd. 2022 (4) TMI 1233 - DELHI HIGH COURT we agree with the assessee that Only Net Interest shall be capitalised. Therefore, we direct the AO to delete the addition - grounds of appeal raised by the assessee are allowed.
Issues Involved:
1. Whether the interest income earned from a sister concern should be treated as "Income from Other Sources" or "Business Income". 2. Whether the interest paid on bank loans can be set off against the interest income earned. Summary: Issue 1: Treatment of Interest Income The primary issue was whether the interest income earned by the assessee from its sister concern should be treated as "Income from Other Sources" or "Business Income." The assessee argued that the interest income was earned from idle funds that were temporarily loaned to its sister concern, Pride Purple Infrastructure, and should therefore be considered as business income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, citing the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs. CIT, which held that interest income from surplus funds should be taxed as "Income from Other Sources" unless it is a separate business activity. The Tribunal, however, found that the facts of the case were distinguishable from the Tuticorin Alkali case. The assessee's business had already commenced, unlike in Tuticorin Alkali, where the business had not started. The Tribunal cited the Bombay High Court's decision in CIT Vs. Lok Holdings, which held that interest income earned from surplus funds temporarily invested could be considered as business income if it was linked to the business activities. The Tribunal concluded that the interest income earned by the assessee had a direct nexus to its business activities and should be treated as business income. Issue 2: Set-off of Interest Paid Against Interest Income The second issue was whether the interest paid on bank loans could be set off against the interest income earned. The AO and CIT(A) had rejected the assessee's claim for set-off, citing the Supreme Court decision in Tuticorin Alkali, which held that interest expenses on business loans could not be set off against interest income assessable under Section 56 of the Income Tax Act. The Tribunal, however, found that there was a clear nexus between the interest paid and the interest earned. The assessee had borrowed funds from the State Bank of India for its business project and temporarily loaned these funds to its sister concern, earning interest. The Tribunal cited several judicial precedents, including the Delhi High Court's decision in PCIT Vs. Jubilant Energy NELP-V Pvt. Ltd., which allowed the set-off of interest paid against interest earned when there was a direct nexus between the two. The Tribunal concluded that only the net interest should be capitalized and directed the AO to delete the addition of Rs. 1,27,82,145/-. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO to treat the interest income as business income and to allow the set-off of interest paid against interest earned, thereby deleting the addition of Rs. 1,27,82,145/-. The judgment emphasized the importance of the nexus between interest paid and interest earned and the concept of real income.
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