Commissioner of Income Tax, Cochin v. Cochin International Airport Ltd

Case Details & Bench

Court: High Court of Kerala
Hon'ble Judges: K. Vinod Chandran
Ashok Menon
Judgment Date: 2018-11-01
Court Decision / Holding: Appeals are allowed restoring the order of the Assessing Officer. No order as to costs.
Final Disposition: Appeals allowed; Revenue succeeds; AO’s order restored; no costs.

Parties to the Case

Appellants / Petitioners

THE COMMISSIONER OF INCOME TAX, COCHIN.

Respondents

M/S. COCHIN INTERNATIONAL AIR PORT LTD, GCDA COMMERCIAL COMPLEX, COCHIN-31.

Legal Representation & Advocates

Counsels for Petitioners

• Sri. Jose Joseph, SC

Counsels for Respondents

• Sri. E.K. Nandakumar (Sr.)
• Sri. K. John Mathai
• Sri. P. Benny Thomas
• Sri. P. Gopinath

Case Synopsis & Summary

This High Court of Kerala decision concerns two Income Tax Appeals (ITA Nos. 269/2009 and 256/2009) filed by the Commissioner of Income Tax, Cochin, challenging the assessment orders of the ITA Tribunal (Cochin Bench) dated 17 March 2004. The central issue is whether the assessee (Cochin International Airport Ltd.) was entitled to set off interest income earned from short-term fixed deposits against interest payable on borrowed funds deployed for airport construction, until the funds were utilized. The Assessing Officer had disallowed the claimed set-off; the Tribunal had attempted to distinguish a Supreme Court decision, Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172, on the grounds of lower interest incidence and mutual offset. The Kerala High Court disagreed with the Tribunal, affirming the broader view that income in the form of interest is taxable unless exempted under a specific provision, and that the fact that funds were borrowed does not negate the revenue character of the income. It cited Kedar Narain Singh v. CIT (1938) 6 ITR 157 (All) to emphasize that interest earned remains income and is generally taxable, with deductions under Sections 56 and 57 subject to statutory provisions. The court also clarifies that deduction for salary against interest income is not permissible when no business income exists. The appeals are allowed and the AO’s order is restored; no costs are awarded.

Provisions of Law Cited

Section 10Section 56Section 57Section 143(3)

Legal Doctrines & Maxims

Anything which can properly be described as income is taxable under the Act unless expressly exempted.
The revenue character of income persists irrespective of the source (e.g., borrowed funds).

Submissions & Arguments

Contentions of Appellants / Petitioners

The Revenue contends that the deduction claimed as set-off cannot be allowed; interest earned on fixed deposits is income and must be taxed unless exempted. It was argued that the Tribunal wrongly distinguished the Supreme Court precedent and that the proper application of law requires denying the set-off, in line with the Tuticorin Alkali decision that income is taxable irrespective of its source.

Contentions of Respondents

The assessee argued that interest income from fixed deposits should be offset against interest payments on borrowed funds; it asserted that the Tribunal correctly distinguished prior rulings and relied on the Supreme Court decision in Tuticorin Alkali, arguing for a favorable treatment of the set-off. The respondents contend that the net result should reduce taxable income by offsetting interest expenditure against interest income.

Cited Precedents (2)

Case Name	Citation	Treatment	Explanation
Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income Tax	1997(227) ITR 172	Positive	Cited to support that income earned from borrowed funds, when invested, is taxable and cannot be exempted under the tax provisions; used to reject the Tribunal’s reasoning that offset was not permitted.
Kedar Narain Singh v. CIT	(1938) 6 ITR 157 (All)	Positive	Supports the principle that anything described as income is taxable unless exempted; reinforces that income from interest remains taxable despite source of funds.

Extracted Judgment Text

Exact text extracted from official judgment records.

## **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]. T**_ **he 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 2[nd] 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**