Case Law Details
Brief Facts of the Case and Question
Brief Facts: Assessee company,engaged in the business of leasing, financing and trading, filed its return of income on 10.11.2006,declaring total loss of Rs. 51,13,930/-. The Assessing Officer (AO) completed the assessment u/s.143(3) of the Act on 24.10.2008,determining the income of the assessee at Rs. 22,51,508/-
During the assessment proceeding ,the AO found that the assessee had debited an amount of Rs.98.60 lacs under the head interest to the income and expenditure account, that out of the interest of Rs.98.60 lacs it reduced interest of Rs.22.51 lacs, that net amount of Rs.76,09,404/- was added to the computation of income.
The receipt and payment of interest was an ordinary activity conducting in the normal course of business ,that the interest receipt should not considered separately ,that it made an application for registration to Reserve Bank of India(RBI)to register it as NBFC,that the net owned funds of the assessee were below the prescribed minimum level, that because of that it could not get registration as NBFC,that it continued to carry on business, that it did not accept public deposits, that since incorporation the business of the assessee remained unchanged, the assessee was maintaining two portfolio i.e. trading portfolio and investment portfolio.
Question Raised:
(1) Interest Income to be taxed under profit and gains of business or profession
(2) whether Expense related to the interest is allowed?
(3) whether Income against which brought forward loss is claimed to be set off should represent business income
Contention of the Assessee:
The assessee was not satisfied with the act of assessing officer, the assessee was engaged in the business of investing, leasing and financing, that it was incorporated with the objective of investing and financing since June,1992,that since then it had carried on the said business ,that receipt and payment of interest was an ordinary activity conducting in the normal course of business, that the interest receipt should not considered separately ,that it made an application for registration to Reserve Bank of India(RBI)to register it as NBFC, that the net owned funds of the assessee were below the prescribed minimum level, that because of that it could not get registration as NBFC.
Aggrieved by the order of the AO, the assessee filed an appeal before the First Appellate Authority(FAA).Before him ,it was argued that the assessee suo moto had disallowed interest expenditure of Rs.76.09 lacs(Rs.98.60 lacs-Rs.22.51 lacs )and Rs.36082/- out of other expenses, the AO had disallowed the whole of expenditure on the ground that the RBI had not recognized the assessee as NBFC, that the AO had treated the interest income of Rs.22.51 lacs as income from other sources without assigning any reason for such treatment, the AO had allowed set off of the unabsorbed business losses/depreciation of earlier years against income assessed for the year under appeal
Contention of Revenue:
The AO referred to the commented of the auditor wherein it was mentioned that the RBI head rejected the application of the assessee to function as NBFC.He held that company was not authorized to carry out business of financing, by the Reserve Bank of India (RBI), that it could not be said that interest income earned by the assessee was from business activity, that an act prohibited under a law could not be allowed under other law.
The learned Commissioner of Income-tax (A) erred in confirming the order of A.O. disallowing the expenses as under:
a) Interest on Loans Rs. 22,51,508/-
b) Legal and professional charges Rs.71,864/-
c) Auditor’s remuneration Rs.22,833/-
d) General Expenses Rs.52,866/-
e) Directors sitting fees Rs.3,500/- Rs. 24,02,571/
AO had treated the interest income of Rs.22.51 lacs as income from other sources without assigning any reason for such treatment, the AO had allowed set off of the unabsorbed business losses/depreciation of earlier years against income assessed for the year under appeal. The AO did not allow the said expenditure which was allowable under section 37.
Held by ITAT:
After hearing the rival contentions, It is evident that the assessee was carrying out business activities, that it had disallowed interest amounting to Rs.76.09 lacs, that it had incurred the expenses for running business and maintaining the corporate entity, that it had shown the income to the extent of income earned, that the RBI had rejected the application of the assessee as it was not having sufficient own fund, the denial by the RBI would not turn the business of the assessee in to an illegal business, that the AO had erred in treating the income of the assessee under the head income from other sources, interest income of the assessee was assessed as business income in the subsequent and earlier years, if income was to be taxed u/s. 57 expenses having direct nexus should have been allowed, that carry forward of business loss and depreciation had to be set off against any other source of income
We find that the AO had assessed the interest income under the head Income from other sources, that the basis for not treating the interest income as business income was the denial of the RBI to register the assessee as NBFC, the FAA upheld the order of the AO and held that the assessee was not carrying on any business, that expenditure incurred by the assessee towards running its office were also disallowed. In our opinion, the approach of the AO and the FAA was not as per the provisions of the Act. Permission/denial by the RBI to register an assessee as NBFC does not decide the issue of carrying of business or make the business illegal. We hold that the interest income earned by the assessee has to be taxed under the head business income and all the expenses related with it have to be allowed.
The AO was of the opinion that the rental income received while letting out the properties was chargeable to tax under the head income from house property, that the hire charges and commission income were chargeable to tax under the head income from other sources, brought forward business losses were not permitted to be set off u/s.72 (1) of the Act. When the matter reached to the Hon’ble High Court it held that Income against which brought forward loss is claimed to be set off should represent business income judged by application of commercial principles and not on application of provisions of Act.
Analysed by Shruti Juneja
