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TMI Blog2015 (7) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... e borrowed funds are directly relatable to setting up of the project, then perhaps the decision of the Ld. CIT(A) would be assailable, but here in this case, the assessee’s claim is that interest expenditure was directly related to earning the interest income taxable under the head “Income from other sources.” Hence the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997 (7) TMI 4 - SUPREME Court) and other decisions as relied upon by the Ld. CIT(A) will not be applicable. In order to establish that such an interest expenditure was directly related to the interest income, the matter is being restored back to the file of the AO to verify the assessee’s contention and to see, whether ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting up a steel plant project in a special economic zone at Hazira, Gujarat. The assessee had not commenced its revenue operations during the year. In the course of the assessment proceedings, the assessing officer noted that the assessee had shown interest on term deposit and ICD of ₹ 1,80,53,158/-. Out of the said amount interest of ₹ 2,87,671/- relating to the project was transferred to the capital work in progress and balance interest of ₹ 1,77,65,487/- was credited in the account. In the computation of income, out of the gross interest income of ₹ 1,80,53,158/-, the assessee has set off the interest expenditure of ₹ 5,02,732/- on borrowings directly linked with funds parked in the deposits. The balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion have been dealt and incorporated by him from pages 7 to 12 of the assessment order. 4. Before the Ld. CIT(A), the assessee again reiterated its submissions and clarified that the assessee company has not debited any interest expenditure relating to its borrowing to the P L account. The total finance cost of ₹ 1,91,18,95,453/- was debited to preoperative expenses and the corresponding interest of ₹ 28,80,96,587/- on deposits earmarked against the borrowing facilities was deducted and the net finance cost of ₹ 1,62,37,98,866/- was shown in C.W.I.P. Only the interest income on term deposits of ₹ 1,80,53,158/- which was parked out of funds not immediately required was offered to tax as Income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred for the purpose of income assessable u/s 56, which the assessee has failed to prove. Since the business of the assessee had not started therefore, there cannot be any profit or loss incurred by the assessee in the relevant assessment year and accordingly the expenditure by the assessee for the purpose of setting up of the business could not be allowed as deduction nor could be adjusted against any other income in any other head. He again referred to catena of decisions in support of decision. 5. Before us learned counsel Shri Vijay Mehta, submitted that the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) will not be applicable at all because here in this case the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. So far as capitalization of interest earned on margin money which were earmarked against the borrowing facility has been accepted by the AO. The only dispute is that whether the interest of ₹ 5,02,732/- paid on the borrowings which were source of funds parked in term deposits has to allow as expenditure or not. If the interest expenditure has direct bearing and nexus with the earning of interest income u/s 56, then the same has to be allowed while computing the said income. Heavy reliance has been placed on the decision of Hon ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. (supra) by the AO as well as Ld. CIT(A) for disallowing the setting off of interest of ₹ 5,02,732/- from the interest incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from other sources. Hence the decision of Hon ble Supreme Court and other decisions as relied upon by the Ld. CIT(A) will not be applicable. In order to establish that such an interest expenditure was directly related to the interest income, the matter is being restored back to the file of the AO to verify the assessee s contention and to see, whether there is a direct nexus of the interest expenditure incurred to the interest income earned. If that is so, then AO will allow the interest expenditure or set off against such interest income, while doing so AO will give due and effective opportunity to the assessee to demonstrate its case before him. Accordingly, the ground raised by the assessee is treated as partly allowed for statistica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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