Case Law Details
DCIT Vs Gujrat State Electricity Corporation Limited (ITAT Ahmedabad)
Conclusion: Interest income earned from staff loans and advances was incidental to the business of power generation and qualifies as “business income” by relying on the judgment of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd.
Held: Assessee, M/s. Gujarat State Electricity Corporation Ltd., was engaged in the business of power generation. AO treated interest income earned on loans and advances provided to employees as “income from other sources” under Section 56 instead of treating it as “business income” as assessee was not in the business of lending and the loans served only personal benefits for employees. CIT(A) allowed the appeal of the assessee in case of both A.Y. 201213 and A.Y. 2016-17. CIT(A) adjudicated both cases pursuant to directions from the Tribunal to reassess the matter in light of judicial precedents, particularly the decision of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd. CIT(A) found that the activity of advancing loans was incidental to the business. CIT(A) noted that assessee did not engage in public lending but restricted loans to its employees. CIT(A) relied on the judgment of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd., which held that interest income from staff loans and welfare activities was incidental to business and qualified as “business income.” For AY 2012-13, CIT(A) deleted the addition of Rs.4,56,05,000/- made by AO, holding that the interest income was rightly classified as “business income.” For AY 2016-17, CIT(A) similarly deleted the addition of Rs.8,00,35,000/-, reiterating that the loans were incidental to the assessee’s business operations. The primary issue under consideration was whether interest income earned from staff loans and advances was incidental to the interest income of Rs.4,56,05,000/- (AY 2012-13) and Rs.8,00,35,000/- (AY 2016-17) earned from loans and advances provided to employees was incidental to the business of power generation and qualifies as “business income.” It was held that AO’s classification of the income under “other sources” was erroneous and contrary to binding judicial precedents. CIT(A) had correctly relied on the judgments of the Orissa High Court in Odisha Power Generation Corporation Ltd. CIT(A) appropriately appreciated the facts and provided a well-reasoned conclusion to delete the additions made by AO. Hon’ble Jurisdictional High Court in the case of Gujarat Urja Vikas Nigam Ltd. also upheld that interest income earned on loans and advances provided to its employees was directly related to the business operations of Power Companies. Thus, Revenue had failed to bring any material evidence to distinguish the facts of the present case from the judicial precedents relied upon.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Both the appeals by the Revenue for Assessment Years (AYs) 2012-13 and 2016-17 are directed against the orders of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre-NFAC, Delhi [hereinafter referred to as “CIT(A)”] passed under Section 250 of the Income Tax Act, 1961[hereinafter referred to as “the Act”]. The CIT(A) orders arose from the assessment orders passed under Section 143(3) of the Act, by the Deputy Commissioner of Income Tax, Circle 1(1)(1), Vadodara [hereinafter referred to as “AO”], dated 25.02.2015 (AY 2012-13) and 28.12.2018 (AY 2016-17).
2. The primary issue in both the appeals concerns the treatment of interest income on loans and advances provided to employees, amounting to Rs.4,56,05,000/- (AY 2012-13) and Rs.8,00,35,000/- (AY 2016-17).
2.1. Since the issues involved are identical except for the quantum of income, both appeals are disposed of together by this consolidated order.
Facts of the case:
3. The assessee, M/s. Gujarat State Electricity Corporation Ltd., is engaged in the business of power generation. During the assessment proceedings for the relevant years, the AO treated interest income earned on loans and advances provided to employees as “income from other sources” under Section 56 of the Act instead of treating it as “business income.” In the assessment order dated 25.02.2015, the AO treated Rs.4,56,05,000/- as “income from other sources,” arguing that the assessee is not in the business of lending and the loans served only personal benefits for employees. Similarly, in the assessment order dated 28.12.2018, the AO classified Rs.8,00,35,000/- under “income from other sources” with the same rationale.
3.1. The issue travelled before the Tribunal in the first round of appeal and the Co-ordinate Bench remanded the matter to the CIT(A), observing that the order lacked a comprehensive evaluation of judicial precedents.
3.2. The CIT(A) allowed the appeal of the assessee in case of both A.Y. 201213 and A.Y. 2016-17. The CIT(A) adjudicated both cases pursuant to directions from the Tribunal to reassess the matter in light of judicial precedents, particularly the decision of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd. The CIT(A) found that the activity of advancing loans was incidental to the business. The CIT(A) noted that the assessee did not engage in public lending but restricted loans to its employees. The CIT(A) relied on the judgment of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd., which held that interest income from staff loans and welfare activities is incidental to business and qualifies as “business income.” For AY 2012-13, the CIT(A) deleted the addition of Rs.4,56,05,000/- made by the AO, holding that the interest income was rightly classified as “business income.” For AY 2016-17, the CIT(A) similarly deleted the addition of Rs.8,00,35,000/-, reiterating that the loans were incidental to the assessee’s business operations.
4. Aggrieved by the orders of CIT(A), the Revenue is in appeal(s) before us with the following grounds of appeal(s):
In ITA No. 1654/Ahd/2024 for A.Y. 2012-13
“i) Whether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified in deleting the addition of Rs.456.05 lakh made by the AO on account of treating Interest income earned from loans to staff and other loans as “Income from other sources” without appreciating the fact that the assessee is not in the business of advancing loans to the staff?
ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
In ITA No. 1656/Ahd/2024 for A.Y. 2016-17
“i) Whether on the facts and circumstances of case and in law, the Ld.CIT(A) is justified in deleting the addition of Rs.800.35 lakhs made by the AO on account of treating Interest income earned from loans to staff and other loans as “Income from other sources” without appreciating the fact that the assessee is not in the business of advancing loans to the staff?
ii) The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
5. During the course of hearing before us, the Authorized Representative (AR) of the assessee argued that the interest income from staff loans and advances was incidental to the business of power generation and should be classified as “business income.” The AR relied on the order of CIT(A) where the reliance was placed on the judgement of Hon’ble High Court of Orissa in case of Odisha Power Generation Corporation Ltd. The AR also pointed out that the Hon’ble Jurisdictional High Court in case of Gujarat Urja Vikas Nigam Ltd. dismissed the appeal of Revenue on the similar issue. The AR further placed reliance on the Co-ordinate Bench decision dated 08/08/2024in case of Gujarat Urja Vikas Nigam Ltd. (ITA Nos. 166/Ahd/2022, 231/Ahd/2024, 223/Ahd/2022 and 293/Ahd/2024).
6. The Departmental Representative (DR) argued that the primary business of the assessee is power generation, not lending or earning interest income. Interest income earned from staff loans and advances was thus unrelated to the core business activity and should be classified as “income from other sources.” The DR contended that the loans provided to employees were for their personal benefit and lacked a direct connection to the business operations of the assessee. The DR sought to distinguish the facts of the present case from those in Odisha Power Generation Corporation Ltd. by asserting that the interest income in that case had a stronger nexus to business operations as charges like electricity and water were also collected from the employees staying in the township. The DR emphasized that interest income is generally taxable under the head “income from other sources” unless it can be conclusively established that it is derived directly from business operations.
7. We have heard the contentions of both the parties and have carefully perused the material on record, including the assessment orders, the orders of the CIT(A), and the judicial precedents relied upon by the parties. The AR contended that the interest income from loans and advances provided to employees is incidental to the business of power generation and should be classified as “business income.” The AR relied on the findings of the CIT(A) and judicial precedents, particularly the decisions of the Hon’ble Orissa High Court in Odisha Power Generation Corporation Ltd. and the Hon’ble Gujarat High Court in Gujarat Urja Vikas Nigam Ltd., which support the assessee’s position. The DR, on the other hand, argued that the interest income is not connected to the core business operations of power generation and should rightly be classified as “income from other sources.” The DR sought to distinguish the present facts from the precedents relied upon by the assessee and defended the classification made by the AO.
7.1. The primary issue under consideration is whether interest income earned from staff loans and advances is incidental to the business of power generation and should be classified as “business income”, or whether it constitutes “income from other sources” as claimed by the Revenue. We note that the CIT(A) relied on binding judicial precedents, particularly the decision of the Orissa High Court in Odisha Power Generation Corporation Ltd., which unequivocally held that interest income from employee loans and welfare activities is incidental to the business and qualifies as “business income.” We also note the decision of the Gujarat High Court in Gujarat Urja Vikas Nigam Ltd., which upheld a similar classification of interest income arising from employee welfare loans as “business income” and dismissed the appeal of Revenue.
7.2. We also take cognizance of the findings of the Co-ordinate Bench of this Tribunal in Gujarat Urja Vikas Nigam Ltd. (ITA Nos. 166/Ahd/2022 and others), where it was observed that the Hon’ble Gujarat High Court in Tax Appeal No. 63 of 2020 upheld that interest income earned on loans and advances provided to employees is directly related to the business operations of power companies. Such income enhances operational efficiency and is incidental to the business, qualifying as ‘business income.’
7.3. It is important to note that the loans and advances were provided solely to employees to ensure their welfare, retention, and operational efficiency, which are critical in the power sector. We also note that the loans were not made to the public at large but were restricted to eligible employees, demonstrating their integral connection to the business. Judicial precedents relied on by the assessee are binding precedents and are directly applicable to the facts of the present case and support the CIT(A)’s conclusion.
7.4. The DR sought to distinguish the facts of the present case from Odisha Power Generation Corporation Ltd. by asserting that the interest income in that case had a stronger nexus to business operations as it also included charges like electricity and water collected from employees. However, we find this distinction immaterial as the primary reasoning in Odisha Power Generation Corporation Ltd. focused on the incidental nature of the income to business operations, which applies equally to the present case. We note that employee welfare measures, including loans and advances, play a vital role in retaining skilled personnel, ensuring uninterrupted business operations, and improving overall efficiency. Such measures are particularly critical in industries like power generation that demand consistent and reliable operations.
7.5. Based on the above findings, we conclude that he interest income of Rs.4,56,05,000/- (AY 2012-13) and Rs.8,00,35,000/- (AY 2016-17) earned from loans and advances provided to employees is incidental to the business of power generation and qualifies as “business income.” The AO’s classification of the income under “other sources” is erroneous and contrary to binding judicial precedents. The CIT(A) has correctly relied on the judgments of the Orissa High Court in Odisha Power Generation Corporation Ltd.
7.6. The CIT(A) appropriately appreciated the facts and provided a well-reasoned conclusion to delete the additions made by the AO. Now Hon’ble Jurisdictional High Court in the case of Gujarat Urja Vikas Nigam Ltd. also upheld that interest income earned on loans and advances provided to its employees is directly related to the business operations of Power Companies. Thus, the Revenue has failed to bring any material evidence to distinguish the facts of the present case from the judicial precedents relied upon. Consequently, the grounds of appeals raised by the Revenue are devoid of merits and are rejected.
8. In the result, both the appeals of the Revenue are dismissed.
Order pronounced in the Open Court on 20th January,2025 at Ahmedabad.
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