2022 (11) TMI 845 - AT - Income Tax
Deduction of interest expenditure u/s 57 against the interest income earned from fixed deposits prior to commencement of business - assessee in its Cross Objection pleads in alternate for treating the interest income as capital receipt which would reduce the cost of the qualifying assets - HELD THAT:- The activity of earning income should be directly connected with or be incidental to the primary activity for which borrowing was made. If the transactions involving activities of earning income and incurring expenditure are not even distantly related to each other, then deduction u/s 57(iii) fails. We are confronted with a situation in which the borrowing was made for developing highway.
FDRs were purchased for utilization of idle funds. Such FDRs were not required to be made as a condition precedent for having letter of credit or furnishing of guarantee for doing any activity connected with the highway development. In such circumstances, it becomes glaring that the proportionate interest expenditure on borrowing for highway development has no relation with the making of FDRs on which the interest income chargeable to tax under the head `Income from other sources’ was earned.
As decided in UNITED WIRE ROPES LTD. [1978 (7) TMI 40 - BOMBAY HIGH COURT] the interest paid on loan could not be set off under s. 57(iii) against interest earned on deposits, in the absence of any evidence that the two transactions were so integrated as to be regarded a single composite transaction. In the hue of the above discussion and the binding precedent, we hold that the ld. CIT(A) was not justified in allowing deduction of proportionate interest on borrowing u/s 57(iii) against the interest income earned on FDRs, which was offered by the assessee as chargeable to tax u/s 56 of the Act. The impugned order is overturned on this score.
Cross objection that the interest income earned on FDRs is a ‘capital receipt’ not chargeable to tax which would reduce the highway development costs including the interest expenditure etc. - distinction between the cases in which the transaction resulting into income is connected with the other activity for which capital was borrowed on which interest is paid - HELD THAT:- We are not convinced with the alternate submission of the assessee. It cannot be said that no income chargeable to tax can be earned simply because the business has not commenced. The receipt of interest on FDRs has no relation whatsoever with the business of the assessee much less with the improvement of State Highway and both the transactions are independent of each other.
Having held that the assessee is not entitled to set off of interest paid amounting to Rs.6.82 crore against the interest income, and further that interest income of Rs.4.91 crore is chargeable to tax separately, the logical consequence of this is that the interest cost of Rs.6.82 crore would go to increase the amount of capital work-in-progress in the same way as has been the interest paid on bank borrowings not used for purchasing FDRs. To clarify, if, for example, an assessee borrows a sum of Rs.100/- for construction on which interest of Rs.10/- is incurred. Further suppose a sum of Rs.80/- out of such borrowing is utilised for making FDRs which is unconnected with the construction. Total interest of Rs.10/- payable by the assessee on the borrowings is liable to be capitalised. Proceeding with the hypothetical example, the assessee capitalized Rs.2 and claimed deduction of Rs.8 against the interest income. Once it is held that Rs.8 cannot be allowed deduction against interest income, then such interest of Rs.8 will also get the same treatment of capitalization as has been given to Rs.2. In other words, the entire interest of Rs.10 on borrowing will be capitalized. We order accordingly.
Addition made by the AO u/s.56(2)(viib) by accepting the value of shares as fair market value (FMV) - assessee, has determined the FMV on the basis of Discounted Cash Flow method, which is one of the accepted methods of valuation of shares - HELD THAT:- The Hon’ble High Court in VODAFONE M-PESA LIMITED [2018 (3) TMI 530 - BOMBAY HIGH COURT] ruling in favour of the assessee held that “the AO is undoubtedly entitled to scrutinize the valuation report and determine a fresh valuation either by himself or by calling for a final determination from an independent valuer to confront the petitioner. However, the basis has to be the Discounted Cash Flow method and it is not open to him to change the method of valuation which has been opted for by the assessee"
Adverting to the facts of the instant case, it is seen that the assessee adopted the DCF method and determined the valuation of share at Rs.2,412/-. As against that the shares were issued only at premium of Rs.1,990/-. Since the AO has not found out any flaw in the calculation done by the IDFC Capital Limited under DCF method, the same has to be accepted. We, therefore, affirm the view taken by the ld. CIT(A) on this score.