2007 (11) TMI 451 - AT - Income Tax

Taxability of Settlement Sums & Employee Loans: Tribunal Ruling on Income & Deductions

The Tribunal held that the sum received on settlement of a claim was taxable under the residuary head, and expenses incurred for earning this income were ... Income from other sources Issues Involved:1. Taxability of the sum received on settlement of a claim.2. Deductibility of interest and other expenditures incurred for earning the income.3. Taxability of interest on loans given to employees.Detailed Analysis:1. Taxability of the Sum Received on Settlement of a Claim:The key issue was whether the sum of Rs. 1.45 crores received by the assessee on settlement of its claim with Pure Drinks Ltd. (PDL) was a capital receipt to be set off against expenses incurred before the commencement of business. The assessee argued that the amount was linked with the business of real estate development and should be adjusted against various expenses incurred. The Assessing Officer (AO) held that the income should be taxed under the residuary head as the business had not commenced. The AO relied on the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which stated that income earned on surplus funds kept with banks should be taxed under the residuary head.The CIT(A) supported the AO's view, stating that the amount was received in the normal course of business and there was no impairment in the source of income. The Tribunal upheld this view, noting that the business had not commenced and the assessee did not acquire any vested right in developing the property. Thus, the income was properly assessable under the residuary head.2. Deductibility of Interest and Other Expenditures:The alternative question was whether the assessee was entitled to deduct interest and other expenditures incurred for earning this income. The assessee argued that if the income was to be taxed under the residuary head, the expenses should be allowed as deductions. The AO disallowed these expenses, stating that the business had not commenced and the expenses had to be capitalized. The Tribunal found that since the interest income was being taxed, all expenditures incurred for earning this income should be deductible under section 57(iii) of the Income-tax Act. The matter was restored to the AO for computation of net interest income after giving a fair hearing to the assessee.3. Taxability of Interest on Loans Given to Employees:The issue was whether interest on loans given to employees was chargeable to tax under the residuary head. The Tribunal referred to its earlier order, which held that the loans were given not for earning interest income but to grant a benefit to employees. Thus, the advances were made in the course of business, and the interest received was not taxable under the residuary head. The appeal was allowed on this ground.Conclusion:The Tribunal concluded that the sum of Rs. 1.45 crores was taxable under the residuary head, and the expenses incurred for earning this income should be deductible. The interest on loans given to employees was not taxable under the residuary head. The appeal was partly allowed, with the matter of computation of net interest income restored to the AO.