Denial of NBFC registration does not decide issue of carrying on business

The Bombay Oil Private Limited Vs. DCIT (ITAT Mumbai)

We notice that the assessee has been earning income of identical nature in the past and the assessing officer has assessed the same under the head Income from business. Even though the principle of resjudicata is not applicable to the income tax proceedings, yet we notice that the tax authorities have not given any reason as to why the decision taken on identical issue in the earlier years should not be followed. Hence we are of the view that the Ld A.R was justified in contending that the principle of consistency should be followed in the year under consideration. The deposits made with the banks and corporate, in our view, can be considered as part of business activities of the assessee as it is engaged in the business of investing in financial instruments.

Further mere rejection of the application for securing NBFC status would not render the assessee business less and the income derived by the assessee would not lose business character. In this regard, he placed reliance on the decision rendered by the co-ordinate bench in the case of Preimus Investment and Finance Ltd (ITA No. 4879/Mum/2012 dated 13- 05-2015), wherein the Tribunal has expressed the view that the denial of registration by RBI as NBFC does not decide the issue of carrying on business.

Full Text of the ITAT Order is as follows:-

The appeal of the assessee is directed against the order dated 20-08- 2014 passed by Ld CIT(A)-20, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) in upholding the assessment of interest receipts under the head Income from other sources as against the claim of the assessee to assess the same under the head Income from business. The assessee is also aggrieved by the decision of Ld CIT(A) in confirming dis allowance of various expenses claimed by the assessee.

2. We heard the parties and perused the record. The assessee is engaged in the business of investment into financial instruments, mutual funds etc. The assessee received interest income and miscellaneous income as detailed below during the year under consideration:-

The assessee offered the above said interest income under the head Business. The assessing officer noticed that the assessee’s application for getting status of “Non-Banking Financial Company” (NBFC) was rejected by RBI. Further the assessee’s objective was to make investments in financing/ mutual funds. Accordingly he held that the deposits made with banks/ corporate cannot be treated as business activity of the assessee. Accordingly he assessed the above said income under the head income from other sources. The assessee had claimed various expenses in its profit and loss account. The AO rejected them, since there was no business income asses able in the hands of the assessee, as the AO had assessed the interest income under the head Income from other sources. The Ld CIT(A) also confirmed the same and hence the assessee has filed this appeal.

3. The Ld A.R submitted that the assessee is engaged in the business of investing in financial instruments and the deposits were made in the course of carrying on the business. He submitted that the assessing officer has accepted the identical business activities carried on by the assessee in the past, i.e., in the 143(3) assessments completed for assessment years 2005-06 to 2009-10. Accordingly he submitted that there is no necessity for the AO to take a different view in this year alone and the same has violated the principles of consistency. In this regard, the Ld A.R placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Radhoswamy Satsang (198 ITR 321), the decision rendered by Hon’ble Bombay High Court in the case of Gopal Purohit (336 ITR 287) and also other decisions.

4. The Ld A.R submitted that the rejection of the application for securing NBFC status would not render the assessee business less and the income derived by the assessee would not lose business character. In this regard, he placed reliance on the decision rendered by the co-ordinate bench in the case of Preimus Investment and Finance Ltd (ITA No. 4879/Mum/2012 dated 13- 05-2015), wherein the Tribunal has expressed the view that the denial of registration by RBI as NBFC does not decide the issue of carrying on business. Accordingly the Ld A.R pleaded that the order passed by the tax authorities should be reversed.

5. On the contrary, the Ld D.R placed strong reliance on the order passed by Ld CIT(A).

6. Having heard rival submissions, we are of the view that there is merit in the contentions of the assessee. We notice that the assessee has been earning income of identical nature in the past and the assessing officer has assessed the same under the head Income from business. Even though the principle of resjudicata is not applicable to the income tax proceedings, yet we notice that the tax authorities have not given any reason as to why the decision taken on identical issue in the earlier years should not be followed. Hence we are of the view that the Ld A.R was justified in contending that the principle of consistency should be followed in the year under consideration. The deposits made with the banks and corporate, in our view, can be considered as part of business activities of the assessee as it is engaged in the business of investing in financial instruments.

6.1. It is a fact that the RBI has rejected its application for NBFC status. In this regard, we may notice that the co-ordinate bench has already taken a view in the case of Preimus Investment and Finance Ltd (supra) that the said fact does not determine the nature of income. Accordingly the said reason given by the tax authorities also fails.

7. At the time of hearing, the ld A.R fairly admitted that the interest on income tax refund is assessable under the head Income from other sources. Accordingly we uphold the view taken by the Ld CIT(A) in respect of interest from income tax refund.

8. In respect of remaining interest income, we set aside the order passed by Ld CIT(A) and direct the AO to assess the same under the head Income from business.

9. We notice that the AO has rejected the claim of expenses, since he assessed the interest income under the head Income from business. There was also no occasion for him to examine the various expenses claimed by the In the preceding paragraphs, we have held that the interest income from deposits made with banks and other parties is assessable as business income. In this view of the matter, the various expenses claimed by the assessee require examination at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) in respect of expenses and restore the same to the file of the AO for examining the same.

10. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 29^th November, 2017.