THE COMMISSIONER OF INCOME TAX, vs. M/S.COCHIN INTERNATIONAL AIR PORT

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ITA/256/2009HC KeralaKLHC01025017200901 November 2018Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON9 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Tribunal's reasoning for distinguishing the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax was incorrect. The Court extracted the relevant paragraph from the Supreme Court judgment, emphasizing that interest earned by the assessee is clearly its income and taxable unless expressly exempted. The fact that the source of income was borrowed money does not detract from its revenue character. The Court further stated that the adjustment of interest payable against interest earned depends on the provisions of the Act. Expenditure would be deductible if the business had commenced, which was not the case here. The assessee might be entitled to capitalize the interest payable, but not to claim an adjustment of this expenditure against interest assessable under Section 56. The Court also held that salary expenditure paid to employees could not be claimed as a deduction against interest income earned from fixed deposits when the business had not commenced, as per the Income Tax Act. Therefore, both issues were answered against the assessee and in favour of the Revenue, restoring the order of the Assessing Officer.

What were the facts?

The assessee, M/s. Cochin International Airport Ltd., was constructing an airport and had taken advances from HUDCO. These borrowed funds were temporarily parked in short-term fixed deposits, generating interest income. The assessee was also liable to pay interest on the borrowed funds. The assessee claimed a set-off of the interest income earned from fixed deposits against the interest paid on borrowed funds. The Assessing Officer rejected this claim, citing the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax. The Income Tax Appellate Tribunal (ITAT) distinguished the Supreme Court decision and allowed the set-off. The appeals were filed by the Commissioner of Income-Tax, Cochin, against the ITAT's order dated March 17, 2004, for assessment years not specified in the provided text.

What were the issues?

1. Whether the assessee was entitled to claim a set-off of interest income earned from fixed deposits against interest paid on borrowed funds, where the borrowed funds were temporarily invested in fixed deposits until their utilization for airport construction, as per Section 56 and Section 57 of the Income Tax Act. Assessee's Contention: The assessee argued that since the borrowed funds were deployed in an income-bearing manner for short-term periods, the interest income generated should be offset against the interest expenditure. Revenue's Contention: The Revenue contended that the interest income earned is taxable and cannot be set off against interest expenditure, relying on the Supreme Court decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-Tax. The Revenue also argued that salary expenditure paid to employees could not be allowed as a deduction against interest income when the business had not commenced. 2. Whether salary expenditure paid to employees could be allowed as a deduction against interest income earned from fixed deposits when the airport construction was ongoing and business income was not yet generated, as per Section 56 and Section 57 of the Income Tax Act.

Which sections of the Income-tax Act were involved?

Section 56,Section 57

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 01ST DAY OF NOVEMBER 2018 / 10TH KARTHIKA, 1940 ITA.No. 269 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 46/2000 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 17-03-2004 APPELLANT/S: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: M/S. COCHIN INTERNATIONAL AIR PORT LTD, GCDA COMMERCIAL COMPLEX, COCHIN-31. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.P.GOPINATH OTHER PRESENT: SRI PKR MENON SR FOR GOI TAXES THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01.11.2018, ALONG WITH ITA.256/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA Nos. 269/2009 & 256/2009 ::2:: IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON THURSDAY ,THE 01ST DAY OF NOVEMBER 2018/10TH KARTHIKA, 1940 ITA.No. 256 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 45/2000 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 17-03-2004 APPELLANT/S: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: M/S.COCHIN INTERNATIONAL AIR PORT LTD., GCDA COMMERCIAL COMPLEX,, COCHIN-31. BY ADVS. SRI.E.K.NANDAKUMAR (SR.) SRI.K.JOHN MATHAI SRI.P.BENNY THOMAS SRI.P.GOPINATH THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 01.11.2018, ALONG WITH ITA.269/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA Nos. 269/2009 & 256/2009 ::3:: ITA No. 269 of 2009 and 256 of 2009 J U D G M E N T Vinod Chandran, J The only question arising in the above appeals covered by the decision of the Hon'ble Supreme Court is whether the assessee was entitled to claim set off of interest income from fixed deposits; from the interest paid on borrowed funds on the sole ground that the borrowed funds having been invested in short term fixed deposits till it was utilised. The assessee is a Company, which at that point of time was constructing an air port, for which purpose advances were taken from HUDCO. The funds were parked in short term Fixed Deposits which earned interest income. The assessee was also liable to pay interest on the borrowed funds. Hence the deduction claimed of the income generated as

ITA Nos. 269/2009 & 256/2009 ::4:: interest from the Fixed Deposits.

2.

The issue stands covered by a decision of the Hon'ble Supreme Court in 1997(227) ITR 172 [Tuticorin Alkali Chemicals and Fertilizers Ltd.v. Commissioner of Income-Tax]. The Assessing Officer had rejected the claim specifically citing the aforesaid decision. The Tribunal very strangely sought to distinguish the decision in the following manner. “In the present case what has actually happened is the lower incidence of interest on borrowed funds by way of deploying the same borrowed funds in an income bearing manner for short term periods. Therefore, we cannot say that there was any set off of interest

expenditure

against

interest income.” 3. We do not think that the reasoning of the Tribunal is correct. We need only extract the 2nd paragraph in page 180 from the aforesaid reported

ITA Nos. 269/2009 & 256/2009 ::5:: decision which is as follows:- It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. It was rightly pointed out in the case of Kedar Narain Singh v. CIT [(1938) 6 ITR 157 (All)]that “anything which can properly be described as income is taxable under the Act unless expressly exempted”. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like Section 10 has exempted it from tax, it will be taxable. The fact that the source of income was borrowed money does not detract anything from the revenue character of the receipt. The question of adjustment of interest payable by the Company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee’s business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under Section 56. Section 57 of the Act sets out in its clauses (i) to (iii) the

ITA Nos. 269/2009 & 256/2009 ::6:: expenditures which are allowable as deduction from income assessable under Section 56. It is not the case of the assessee that the interest payable by it on term loans is allowable as deduction under Section 57 of the Act.

4.

In the first assessment year there is yet another question as to whether the expenditure claimed on salary could have been allowed as against the interest income earned by the assessee from Fixed Deposit. The assessee had claimed expenditure of salary paid to its employees from the interest income earned from the Fixed Deposits. Admittedly, at that point, there was no business income available to the assessee since the air port had not been established. The above extracted paragraph also answers this question. Hence there could have been no expenditure claimed under the Income Tax Act. We hence answer that question also against the assesse and in favour of the Revenue.

ITA Nos. 269/2009 & 256/2009 ::7:: Appeals are allowed restoring the order of the Assessing Officer. No order as to costs. Sd/- K. Vinod Chandran, Judge Sd/- Ashok Menon, Judge jma

ITA Nos. 269/2009 & 256/2009 ::8::

APPENDIX OF ITA 256/2009 PETITIONER'S/S EXHIBITS: ANNEXURE A COPY OF ORDER U/S. 143(3) DATED 23.1.1998 FOR THE ASST. YEAR 1995-96. ANNEXURE B COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 30.11.1999 ANNEXURE C COPY OF THE ORDER DATED 17.3.2004 OF THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH IN ITA NO.45/COCH/2000

ITA Nos. 269/2009 & 256/2009 ::9:: APPENDIX OF ITA 269/2009 PETITIONER'S/S EXHIBITS: ANNEXURE A COPY OF ORDER U/S. 143(3) DATED 08.10.1997 FOR THE ASST. YEAR 1996-97 ANNEXURE B COPY OF ORDER DATED 30.11.1999 OF THE COMMISSIONER OF INCOME TAX(APPEALS) ANNEXURE C COPY OF THE ORDER DATED 17.3.2004 OF THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH IN ITA NO.46/COCH/2000

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