Case Law Details
Delhi High Court held In the case of Vodafone South Ltd. vs. CIT that the netting of the interest paid on the borrowed sum against the interest income earned is allowed. There was a direct nexus between the earning of interest on the loan advanced by the Assessee and payment of interest to the bank. Since the interest paid to bank was in the nature of an expenditure wholly and exclusively incurred for the purpose of earning the interest income, it is permitted to be netted against such ‘income from other sources’ in terms of Section 57 (iii).
Facts of the Case
The Assessee is engaged in the business of providing cellular services in the Delhi Region. The assessee actually commenced its business form June, 2002. During the AY 2002-03 the Assessee availed of financing facilities from the HSBC Bank. HSBC’s offered the Assessee a combined credit limit of Rs.340 crores. The terms and conditions set out in the said sanction letter stated inter alia that the Assessee could advance the funds availed by it to any other concern, other than in the usual course of business, after receiving the bank‟s prior approval. Subsequent assessee availed a loan of Rs. 25 crores from HSBC at 11.60% interest p.a. immediately thereafter, on same date; the Assessee advanced a loan of Rs.25 crores to its holding company Sterling Cellular Limited (SCL) @ 11.75% interest p.a. The Assessee filed its return for AY 2002-03 declaring a loss of Rs. 35,69,97,065, which it subsequently revised at a profit of Rs. 1,00,690. In the revised return the Assessee showed income from other sources after adjusting interest expenses of Rs. 77.86 lakhs. The AO referred to the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 6 SCC 117 and held that the interest paid to the bank would have been treated as business expenses but since the business was yet to commence they would form part of the pre-operative expenses to be capitalised. The interest earned from advancing of the loan to holding company would be taxed separately as income from other sources. The AO accordingly made an addition of Rs.78,86,987/- to the income of the Assessee for AY 2002-03.
For AY 2003-04 the Assessee filed its return declaring a loss of Rs. 2,62,87,59,740 after claiming setoff of interest income of Rs. 81,00,165 against the interest expenses. By referring to the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 6 SCC 117, the AO held that setting off the interest income of the pre-operative period against the interest expense was not allowed. It was held that “interest expense will form part of the pre-operative expenses pending capitalization and the interest income will be taxed separately as income from other sources.” The interest income of Rs. 81,00,165 was added to the income of the Assessee for AY 2003-04.
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