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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Sanjay Arora & Dr. S. Seethalakshmi
Appellant by: Sri.Anil D Nair, Advocate Respondent by: Sri.Sanjit Kumar Das, CIT-DR Date of Hearing: 21.12.2023 Date of Pronouncement: 07.03.2024 O R D E R Per: Sanjay Arora, AM This is an Appeal by the Assessee agitating the Order dated 27.07.2021 by the Commissioner of Income-tax (Appeals), Income Tax Department [CIT(A)], disallowing the assessee’s appeal contesting it’s assessment under section 143(3) of the Income Tax Act, 1961 (the Act) dated 28.12.2016 for assessment year 2014-15.
The background facts of the case are that the assessee-company, in the business of hospitality and agriculture, returned an income (loss) of Rs.(-) 178.97 lakhs for the relevant year, incurring a total expenditure of Rs.410.61 lakh; the difference representing interest income on investment bearing coupon rate of 12% per annum. As no business had commenced; the company being engaged in acquiring agricultural land and hospitality ventures in different parts of the country, the entire expenditure was by way of pre-operative expenditure. The same was till the current year, as stated, being financed by share capital and unsecured loans from the Directors.
(AY 2014-2015) Muthoot Agri Projects & Hospitalities P.Ltd. v. Asst. CIT During the current year, the company mobilized public borrowings through secured debentures (at Rs.61.32 crore) which, as stated, was used partly for repayment of Directors’ loans and partly (Rs.37.50 crore), being surplus for the time being, invested in what it called perpetual debt instrument (PDI), fetching an interest income of Rs.231.62 lakh. The Assessing Officer (AO) disallowed the assessee’s claim for loss as there was no question of a business loss when the business itself had not commenced, and which could therefore only be on carrying business, i.e., after its commencement. Two, interest on surplus funds for the time being was not liable to be capitalized but assessed as income from other sources u/s.56. It was accordingly assessed at Rs.231.62 lac, and confirmed in first appeal for the same reason, both the assessing and the first appellate authority relying on the decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC).
Before us, in second appeal, it was explained by Sri. Nair, the learned counsel for the assessee, that granting that interest income on funds surplus for the time being is assessable u/s.56, it is only the income, i.e., net of expenditure there-against, that is liable to be so assessed. The entire investment was out of borrowed funds bearing an interest rate of 11% p.a. As such, only 1%, representing the difference (12% - 11%), as against 12%, is liable to be assessed. Sri Das, the ld. CIT-DR, would submit that there is no finding at any stage as to the entire investment as having been financed by secured debt, only which would entitle the assessee it’s claim of deduction of interest expenditure w.r.t. the entire interest income. Reliance on Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) was reiterated.
We have heard the parties, and perused the material on record. 4.1 Though the assessee, we observe, in it’s pleadings before the AO, stated of capitalization of the impugned interest income, or of setting it off against preoperative expenditure, as in fact it does in returning a loss of Rs.178.97 lakh, before us, and toward which we have also seen it’s grounds of appeal (GoA), it’s only 2 | P a g e (AY 2014-2015) Muthoot Agri Projects & Hospitalities P.Ltd. v. Asst. CIT claim was for being allowed proportionate interest expenditure against interest income inasmuch as the entire investment in PDI is sourced from secured debt. How, pray, we wonder, could that be faulted with? The only reason we observe is per para 2.3.7 (page 7) of the assessment order which, in its relevant part, reads as under:- “2.3.7 As mentioned above, assessee is also not entitled to deduct the same u/s. 57 as, in the case of the assessee the payment of interest is on funds raised through secured debentures and this fund was not meant for investing in PDI’s but for fulfilling the objectives of the company. Hence the same cannot be considered as expenditure laid out wholly and exclusively for earning such income and hence cannot be deducted u/s 57 of the IT Act, 1961. The findings of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals v. CIT is relevant to be considered in this regard, portions of which are reproduced below. ....................” The same, firstly, makes it abundantly clear that the investment in PDI is financed by funds raised through debentures, meeting the argument advanced by Sri. Das. Two, it is stated that the funds so raised were not meant for investment in PDI, but only for the object/s of the company, placing reliance on Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), reproducing there-from at pages 8-10 of his order, which stands also reproduced by the ld. CIT(A). The assessee is duly authorized by his Memorandum of Appeal (MoA) to invest it’s surplus funds in suitable instruments. The issue in any case is the head of income under which the interest income is liable to be assessed and, two, the extent thereof. The same is admittedly u/s.56, upon allowing deduction of interest incurred, claimed at 11% p.a., u/s.57(iii). Only real income, subject no doubt to the provisions of the Act, is liable to be taxed. The matter is well settled (see, inter alia, Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC); Southern Technologies Ltd. v. Jt. CIT [2010] 320 ITR 577 (SC); CWT v. Bombay Suburban Electric Supply Ltd. [1976] 103 ITR 384 (Bom)). The reliance by the Revenue on the decision in Tuticorin Alkali Chemicals (supra) is opposite. So, however, in the facts of the case, as noted by it (pg. 180 E of the Reports), there was no claim by the assessee in respect of interest paid, or for that matter, any expenditure, u/s.
57. Rather, the Hon'ble Apex Court clarified that if borrowed capital 3 | P a g e
(AY 2014-2015) Muthoot Agri Projects & Hospitalities P.Ltd. v. Asst. CIT is used for earning income, that income will have to be taxed in accordance with law (pg. 179H). What, then, we wonder is the dispute about?
4.2 Continuing further, it is, as afore-noted, not the case of the assessee that it has incurred interest in a higher sum, resulting in a loss, which it be either allowed to be carried forward or otherwise to be capitalized. The AO’s finding that the borrowed capital is not related to the investment in project is, under the circumstances, though correct, of no consequence. The income arising on investment of borrowed capital, surplus for the time being, is admitted. The only question is, as afore-noted, the head of income under which the same is to be brought to tax and, two, the extent thereof. There is, further, no pleading or any even a claim qua the balance expenditure, with in fact the Bench during hearing specifically confirming with Sri Nair as to if, therefore, the assessee only claims deduction for 11/12 of the interest income as proportionate interest expenditure. We find no infirmity in the assessee’s said claim. The decision in Rajkumar Sharma v. Asst. CIT (ITA No.3083/Del/2018, dated 16.10.2019), copy of which is placed on the file, was not adverted to by Sri Nair during hearing and, therefore, cannot be regarded as part of the Tribunal’s record as per it’s rules (r. 18(6)), nor indeed was there therefore any occasion for the Revenue to respond thereon. The issue of matching period, in view of the strict language of s.57(iii), as against s.36(1)(iii), applicable in that case, would in any case distinguish the said decision, which we observe as rendered de hors the proviso thereto.
4.3 No claim, apart from the foregoing, i.e., proportionate interest on borrowed capital invested in PDI, since allowed by us at Rs. 212,31,808, we clarify, was made before us. That is, no case qua capitalization of interest stands made before us even as the assessee per it’s written submissions refers to AS-16, i.e., the Accounting Standard on Borrowings, with their further being nothing to suggest construction and, rather, the assessee acquiring agricultural land, income from which is tax-exempt,
(AY 2014-2015) Muthoot Agri Projects & Hospitalities P.Ltd. v. Asst. CIT besides ‘other projects’. The disallowance of the balance expenditure of Rs. 198.29 lacs (i.e., Rs. 410.61 lacs – Rs. 212.32 lacs) remains un-interfered with.
In sum, the assessee, a company setting-up business during the relevant year, though claiming loss (qua preoperative expenditure, on setting it off interest income), rightly disallowed, restricts it’s claim before us to expenditure incurred by way of interest on secured debt deployed in debt instrument earning interest income, assessed u/s. 56 and, again, rightly so, i.e., in computing the said income. The facts are admitted. It is only real income, unless constrained by law, that is liable to tax. Though the nomenclature ‘perpetual debt’ is inconsistent with the stated position of parking of business funds, surplus for the time being, the same shall have no immediate bearing in the instant case, limited to deductibility of interest on borrowed capital placed in a debt security for interest. The Revenue’s insistence on taxing the gross receipt, de hors expenditure there-against, is without any factual or legal basis. In the facts of Tuticorin Alkali Chemicals (supra), there was no claim of expenditure u/s. 57. It is a clear case of misapplication of a decision, applicable in principle, though distinguishable on facts. The disallowance of the balance expenditure, not agitated before us, gets confirmed by default. We decide accordingly.