INCOME TAX ACT, 1961

Section 57(iii) Section 36(1)(iii)

Income from other sources - Interest income - Setting off interest paid to DHFL and its associate concerns as interest income was not treated as business income/capitalized -

During the course of the assessment proceedings, it was observed by the AO, that the assessee had credited the interest income of Rs. 26,37,87,842 in its profit and loss account for the year under consideration. It was observed by the AO that out of the loan of Rs. 184 crores that was raised by the assessee from DHFL an amount of Rs. 94,12,62,248 was advanced against capital asset commitment to two associate concerns. The AO observed, that the interest income of Rs. 26,37,87,842 earned by the assessee from its non-business advances was taxable under the head income from 'other sources'. Insofar the interest expenses and other expense/amortisation expenses that were charged by the assessee to its 'profit and loss account' for the year under consideration were concerned. Same would be allowable as a deduction as and when the income from the project would be available for computation under the head 'Profit and Gains from Business or Profession'. On the basis of his aforesaid observations the AO assessed the entire interest income of Rs. 26,37,87,842 as the income of the assessee from 'Other sources'. CIT(A) had concluded that the interest paid by the assessee was not eligible for deduction under section 36(1)(iii) and also section 57(iii). Apart there from, the CIT(A) also upheld the view taken by the AO in treating the income of Rs. 26,37,87,842 as the income of the assessee from 'other sources'. Resultantly, the appeal filed by the assessee was dismissed.Held: As long as it was established that the 'Interest paid' by the assessee on the loans raised from DHFL as per the mandate of section 57(iii) was an expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning of the 'Interest income' from the associate concerns to whom interest bearing loans were given, then such 'Interest paid' would be eligible for deduction against the 'Interest received' by the assessee-company. The factual position as to whether the assessee satisfies the requisite conditions envisaged in section 57(iii), therein making it eligible to claim deduction of the 'Interest paid' on the loans raised from to DHFL against the 'Interest income' received from the associate concerns to whom interest bearing loans were given cannot be safely gathered from the records before the Tribunal, and would require verification, therefore, the matter in all fairness was, therefore, restored to the file of the AO.

Relied:India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC) : 1966 TaxPub(DT) 278 (SC). Distinguished:Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 227 ITR 172 (SC) : 1997 TaxPub(DT) 1304 (SC).

REFERRED : ITAT, Mumbai, 'C' Bench in the case Preimus Investments and Finance Ltd. v. Dy. CIT-3(2), Mumbai ITA. No. 4879/Mum/2012, dated 13-5-2015) : 2015 TaxPub(DT) 2505 (Mum-Trib), ITAT, Bengaluru 'B' Bench in the case of ITO v. Bank Note Paper Mill India (P) Ltd. (2016) 56 ITR(Trib) 266 (Bang-Trib) : 2017 TaxPub(DT) 1292 (Bang-Trib) CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) : 2000 TaxPub(DT) 625 (SC), India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC) : 1966 TaxPub(DT) 278 (SC), CIT v. Srishti Securities Pvt. Ltd. (2010) 321 ITR 498 (Bom) : 2010 TaxPub(DT) 313 (Bom-HC), ITAT, Mumbai 'C' Bench in the case of Chhaganlal Khimji & Co. Pvt. Ltd. v. Asstt. CIT [ITA. No. 7629/Mum/2013, dated 23-9-2015), CIT v. Lok Holdings (2009) 308 ITR 356 (Bom-HC) : 2009 TaxPub(DT) 268 (Bom-HC), CIT v. PHIL Corporation Ltd. & Anr. (2011) 202 Taxman 368 (Bom-HC) : 2011 TaxPub(DT) 2057 (Bom-HC), CIT v. Jayant H. Modi (2015) 232 Taxman 337 (Bom-HC) : 2015 TaxPub(DT) 2836 (Bom-HC) and CIT v. Parle Plastics Ltd. & Anr. (2011) 332 ITR 63 (Bom-HC) : 2011 TaxPub(DT) 481 (Bom-HC).

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