Interest paid and received prior to commencement of business.
Issue:
What will be the treatment of Interest paid and received prior to commencement of business? Whether it will be netted of? Whether interest paid is capitalised and interest received is charged as income under the head Income from Other Sources?
Let see what Supreme Court says in case of Tuticorin Alkali Chemicals & Fertilisers Ltd. vs. Commissioner of Income Tax.
In Tuticorin Alkali Chemicals & Fertilisers Ltd the assessee borrowed funds from the bank for the purpose of setting up of the factories. That part of the borrowed funds which was not immediately required by the company was kept invested in term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company.The question arises here is what will be treatment of Interest earned from deposits with banks and interest paid on borrowed funds from the bank. Supreme Court held that interest income earned should be charged as income under the head Income from Other Sources and interest paid prior to commencement of business should be capitalised.
Copy of the order is attached
Supreme Court of India-converted
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