2015 (9) TMI 1503 - AT - Income Tax

Tribunal decision: Business expenses allowed, interest income classified, notional income deletion upheld

The Tribunal partly allowed the assessee's appeal, permitting Rs. 50,00,000/- as business expenditure and classifying interest income of Rs. 26,43,583/- ... Allowable business expenditure - non set up of business - Held that:- In the instant case, the assessee has not only purchased the land at Ooty but also made agreement for the purchase of land at various places. The MOU with AWHO was put into operation and so, in view of the above we are of considered opinion that the business of the assessee was set up, and therefore, the action of the ld. CIT(A) in holding that business activity was not carried out, is not justified. Accordingly, we hold that interest and other expenses incurred by the assessee and claimed as business expenditure are allowable subject to other provisions of the Act. Payment of interest was not a penalty and therefore the same is allowable u/s 37(1) of the Act. As regards to balance interest expenditure payable to the AWHO is concerned, we agree with the contention of the ld AR that the assessee has paid advances for the purpose of purchase of land and which is one of main business activity of the assessee. Merely withdrawing capital by one of the partner at the fag end of the previous year out of the capital of partners lying in the firm, it cannot be said that the assessee has utilized interest bearing fund for the purpose of activity other than business, hence, the interest expenditure is held to allowable business expenditure. Therefore, the entire interest is allowable as business expenditure subject to the allowability under the provision of section 40(a)(ia) of the Act. As regards to the alternative disallowance of interest u/s 40(a)(ia) interest of ₹ 50.00 lakhs, being already paid before the end of the relevant previous year and therefore provision of section 40(a)(ia) of the Act are not applicable in respect of said interest paid of ₹ 50.00 lakhs. As regards to the balance interest of ₹ 17,36,671/- which was payable at the end of the years, the assessee has already not pressed for allowance of the same u/s 40(a)(ia) of the Act. So, although same is otherwise held as allowable business expenditure, but it is not allowed in the current assessment year in terms of section 40(a)(ia) of the Act. Considering the interest income from fixed deposit with bank as income from other sources as against the business income claimed by the assessee - Held that:- The assessee has made fixed deposit for the purpose of bank guarantee to be submitted to the AWHO for the purpose of getting advance. Further the ld AR has also relied on the judgement of the Hon’ble jurisdictional High Court in the case of Snam Progetti Vs. Additional CIT reported in [1981 (2) TMI 50 - DELHI High Court ]. In that case the assessee was an Italian company and came to India as a Contractor and extra funds available were deposited in Bank. The interest earned on funds with bank has been held as business income by the Hon’ble Court. In view of the above judgements of the various courts, we are of the considered opinion that the assessee was required to make a fixed deposit for the purpose of business necessity and therefore, the interest income earned thereon falls under the head “Profit and Gains of business and Profession”. Charging of notional interest - Held that:- The finding of the ld. ld. AO that the fund of ₹ 5.50 crores was invested elsewhere and details of which was not disclosed, is found not to be correct. The assessee has submitted details of utilization of the funds before the ld CIT(A) and according to which it is clear that the funds were invested for the purpose of purchasing land or investment in Fixed Deposit. The ld. CIT(A) has rightly held that the ld. AO cannot dictate terms and conditions of business to the assessee. The Hon’ble Gauhati High Court in the case B&A Plantation (1999 (12) TMI 43 - GAUHATI High Court ) held that no notional amount of interest could be assessed on loan given to sister concern on the ground that interest ought to have been charged. Therefore, in our considered opinion, charging of notional interest has rightly been deleted by the ld CIT(A) Issues Involved:1. Disallowance of business expenses and interest.2. Classification of interest income.3. Deletion of notional interest income.Detailed Analysis:1. Disallowance of Business Expenses and Interest:The assessee contested the disallowance of business expenses amounting to Rs. 67,36,671/- (interest) and Rs. 11,42,700/- (other expenses) by the CIT(A), who had taken the business income as 'NIL'. The CIT(A) justified the disallowance of Rs. 50,00,000/- as penal interest and the remaining Rs. 17,36,671/- was disallowed under Section 36(1)(iii) of the Income-tax Act, 1961, as the funds were advanced to a partner. Additionally, the CIT(A) upheld the disallowance under Section 40(a)(ia) for non-deduction of TDS.The Tribunal held that the business was set up when the assessee entered into an agreement with AWHO and purchased land. Therefore, the expenses were allowable as business expenditure under Section 37(1). The Rs. 50,00,000/- paid to AWHO was not penal in nature but a contractual obligation, thus allowable. The remaining interest of Rs. 17,36,671/- was also deemed allowable as business expenditure. However, the interest of Rs. 17,36,671/- was disallowed under Section 40(a)(ia) due to non-deduction of TDS.2. Classification of Interest Income:The assessee argued that the interest income of Rs. 26,43,583/- from fixed deposits should be considered as business income since the deposits were made to secure a bank guarantee for business purposes. The Tribunal agreed, citing various judicial pronouncements, and classified the interest income as business income. This classification rendered the alternative arguments of the assessee moot.3. Deletion of Notional Interest Income:The revenue's appeal contested the deletion of notional interest income of Rs. 38,50,000/- by the CIT(A). The Tribunal upheld the CIT(A)'s decision, noting that the funds were utilized for business purposes, and the AO's estimation of notional interest was not justified. The Tribunal cited the Gauhati High Court's decision in B & A Plantations & Industries Ltd. vs. CIT, which held that notional interest could not be assessed on loans given to sister concerns without charging interest.Conclusion:- The appeal of the assessee was partly allowed, allowing Rs. 50,00,000/- as business expenditure and classifying the interest income of Rs. 26,43,583/- as business income.- The revenue's appeal was dismissed, upholding the deletion of notional interest income of Rs. 38,50,000/-.Order Pronounced in the Court on 30/09/2015.