Interest paid to earn Interest is Allowable Deduction: Delhi HC [Read Judgment]

A two-judge bench of the Delhi High Court has held that deduction under section 57 of the Income Tax Act is allowable for payment of interest to earn interest.

The respondent-assessee taken ICDs of Rs.55.30/- Crores at the interest rate of 12% per annum from M/s Jubilant Energy (Kharsang) Private Limited. Payments under the ICDs were received during the preceding year, except for Rs.15/- lacs, which was received between 5th April 2010 and 4th May 2010. ICDs were repaid to M/s Jubilant Energy (Kharsang) Private Limited between 31st May 2010 to 25th March 2011 leaving an outstanding balance of Rs.1 Crore at the end of the year in question. The respondent paid interest @ 12% on the sum borrowed and had received interest @ 12.5 % on the money lent. The Assessing Officer denied deduction in respect of such interest paid by the respondent.

The First Appellate Authority also not allowed the deduction of the interest paid from interest received.

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The Tribunal observed that the respondent-assessee had incurred expenses of more than Rs.2,00,000/- on operations and support staff etc. The Tribunal has opined that the business had commenced as the respondent-assessee had entered into business transfer agreement dated 1st April 2007. It could be urged that this finding is not detailed, albeit the respondent-assessee had furnished performance bank guarantee for M/s Jubilant Capital Private Limited and M/s Jubilant Services Private Limited. The Tribunal further observed that the Commissioner of Income Tax (Appeals) had allowed deduction under Section 35D of the Act, thereby indirectly accepting that respondent-assessee had commenced business.

Dismissing the appeal filed by the department, the division bench comprising Justices Sanjiv Khanna and Anup Jairam Bhambhani held that the respondent-assessee had advanced more than Rs.12.11 Crores to M/s Jubilant Capital Private Limited in furtherance to the business transfer agreement to meet the cash calls for participatory interest in the Ankleshwar Block.

“Thus, the finding that the business was ‘set up’ has sufficient backing and support from the material and evidence referred to in the impugned order. In any case, this objection regarding ‘commencement of business’ loses much significance and importance in view of the direct nexus between interest paid and interest received on ICDs. Interest paid to earn interest has to be allowed as a deduction under Section 57 of the Act,” the bench said.