Issue under Consideration
Common appeal is raised by the revenue against the order of CIT (A) relating to assessment year 2007-08, 2008-09 & 2009-10 as CIT (A) deleted the addition of Rs. 17, 28, 644/- without considering the fact that Interest expenditure cannot be allowed as deduction against the interest income during the construction period.
Brief of the case
In the Case of ACIT vs. Z Square Shopping Mall Private Limited, ITAT Lucknow held that the interest earned on FDR, Gains from investment of Mutual Fund is not inextricably linked or connected with the construction activities, Therefore it should be treated as revenue receipt and taxable under the head income from other source. Further for Income from sale of wastage assessing officer is instructed to verify the nature of transaction. If transaction is inextricably linked with the construction activity then it would be treated as capital receipt and will reduce the cost of project otherwise it would be revenue receipt.
Facts of the case
a. The assessee company was involved in the construction activities of Multiplex and shopping malls.
b. The company purchased land and started construction process. Due to shortage of fund, the assessee company applied to a bank for the term loan and the same got sanctioned.
c. Certain contract took times to execute and procedural or compliance issue leads to delay in project, therefore company decided to invest the term loan borrowed by it so that burden of interest cost will got reduced.
d. The Assessee filed return the return claiming interest income as capital receipts therefore reduce the cost of project.
Contention of Revenue
The Assessing officers, is of the view that interest income is of revenue nature and after relying upon the judgment of the Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. Vs CIT (supra), treated interest income as Income from other sources and made the addition.
Facts of Tuticorin Alkali Chemicals and Fertilizers Ltd Vs CIT (Supra)
a. It is concluded that if the capital of a company is fruitfully utilized instead of keeping it idle, then such fruits is having a character of revenue instead of capital and source of fund will not make any difference i.e. own surplus fund, borrowed fund etc. Further added that income is something which flows from the property & something received in place of property will be capital receipt. In a Like manner interest earn on short term deposit will be taxable under the head of other sources.
b. As per Assessee Company, interest payable should be adjusted with Income from other source under section 56 of Income Tax Act 1961. In Income Tax Act, 1961 provisions with respect to deduction/ allowance/set off of expenditure under different heads of Incomes are clearly defined. Section 57 of Income Tax Act, 1961 clearly states the expenditure which can be adjusted with the Income from other sources taxable under section 56 of the I. Tax Act, 1961. Interest payable on term loan is not covered under section 57, hence cannot be allowed as deduction.
Further, Sec 70 and Section 71 deals with the setoff of income within the head or with other head of income respectively. Even these provisions are of no value, as income under the head PGBP will be computed only after the commencement of the business. Mean while there will be no deduction on account of expenditure relating to setting off of factory nor it can be set off with any other head of Income.
Contention of Assessee Company
Assessee added that interest income earned by them is not out of surplus fund rather it is generated from borrowed fund which was kept aside due to delay in project execution and basic intention behind the investment was to reduce the cost of project. The assessee company place its reliance upon the judgment of Hon’ble Apex Court in the cases of CIT vs. Bokaro Steels ltd., 102 Taxman 94 and CIT Vs. Karnal Cooperating Sugar Mills Ltd., 118, Taxman 489 and on Indian Oil Panipat Power Consortium Ltd. vs. Income Tax Officer, 181, Taxman 249 (Delhi)
a. Interest earn on deposit is treated as capital receipts and lead to the reduction of cost of their project or asset.
b. It is concluded that if the receipt of such income is inextricably linked to the setting up of the project, it would be capital receipt and will lead to reduction of Cost otherwise it would be revenue receipt.
Held by the Tribunal using the power of Section 257 of Income Tax Act, 1961
In the light of various case laws : It is observed that the assessee invested the borrowed fund in FDR & Mutual fund, as there is no need of fund in construction process during that specific period. Therefore, fund invested is not inextricably linked to the setting up of the construction activities and it is rightly treated by the assessing officer.
Further instruction is made to assessing officer to verify the nature of Income from sale of wastage, if assessing officer is of the view that such income is inextricably linked with the construction activities then it would be treated as Capital Receipt otherwise.