2012 (12) TMI 285 - AT - Income Tax

Tribunal directs deletion of deposit forfeiture addition & disallows interest under Income Tax Act

The Tribunal allowed the appeal, directing the deletion of the addition related to the forfeiture of deposit and the disallowance of interest under ... Addition on account of forfeiture of deposit as revenue receipt – Held that:- Compensation arises out of the agreement of letting out immovable property and therefore, assumes the nature of the income from house property. Therefore, in our opinion, such receipt would fall under the head ‘Income from house property’. - Any other receipt other than the annual value cannot be computed as income under this head - compensation received by the assessee cannot be taxed – addition deleted Disallowance of interest u/s. 36(1)(iii) of the I.T. Act – alleged that the assessee company has given loans to its sister concern by charging interest @4% and assessee is paying interest @8% on borrowed funds – Held that:- Loan advanced by the assessee at concessional rate to the sister concern is out of the redemption of units of mutual fund. When the assessee has not utilised the borrowed funds for advancing the same at concessional rate to the sister concern when the assessee’s own money out of the redemption of units of mutual fund has been given at concessional rate to sister concern, the same does not call for disallowance of proportionate interest u/s.36(1)(iii) of the I.T. Act - borrowed funds from Axis bank has gone towards purchase of the property and the amount advanced to the sister concern is out of redemption of Prudential ICICI liquid fund – addition deleted – In favor of assessee Issues Involved:1. Taxability of forfeiture of deposit as revenue receipt.2. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.Issue 1: Taxability of Forfeiture of Deposit as Revenue ReceiptThe first issue concerns the confirmation by the CIT(A) of the addition of Rs. 35,07,844/- made by the AO, treating the forfeiture of deposit as a revenue receipt.Facts and Arguments:- The assessee credited Rs. 35,07,884/- as other income due to the forfeiture of a deposit but later claimed it as a capital receipt, not chargeable to tax.- The AO, referencing the terms of the Letter of Intent (LOI) between the assessee and Credit Suisse First Boston (India) Securities Pvt. Ltd., treated the forfeiture as a revenue receipt. The AO argued that the forfeiture compensated for the non-execution of a lease agreement, which deprived the assessee of potential rental income, thus making it a revenue receipt.- The CIT(A) upheld the AO's decision, stating that the forfeiture did not impair or destroy the profit-making apparatus of the assessee and thus was a business receipt.Judgment Analysis:- The Tribunal considered various precedents, including the Hon'ble Bombay High Court's decision in Mangla Homes Pvt. Ltd. and the Mumbai Bench of the Tribunal in Addl. CIT Vs. Rama Leasing Pvt. Ltd., which held that compensation for premature termination of lease, though a revenue receipt, is not chargeable to tax.- The Tribunal found that the forfeited deposit, though falling under 'Income from house property,' cannot be taxed as it does not represent the annual value of the property.- Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition.Issue 2: Disallowance of Interest under Section 36(1)(iii) of the Income Tax ActThe second issue pertains to the confirmation of the disallowance of interest amounting to Rs. 1,39,096/- under Section 36(1)(iii) by the CIT(A).Facts and Arguments:- The AO observed that the assessee charged 4% interest on a loan to its sister concern while paying 8% on borrowed funds, leading to a disallowance of the differential interest.- The assessee argued that the loan to the sister concern was from the redemption of Prudential ICICI liquid fund and not from borrowed funds.- The CIT(A) upheld the AO's disallowance, reasoning that the assessee failed to establish a business purpose or expediency for advancing the loan at a lower interest rate.Judgment Analysis:- The Tribunal noted that the loan from Axis Bank was used for purchasing property and not for advancing to the sister concern. The loan to the sister concern was from the redemption of mutual funds.- Since there was no direct nexus between the borrowed funds and the concessional loan, the Tribunal found the disallowance under Section 36(1)(iii) unwarranted.- The Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance.Conclusion:The appeal filed by the assessee was allowed. The Tribunal directed the deletion of the addition related to the forfeiture of deposit and the disallowance of interest under Section 36(1)(iii). The judgment emphasized the importance of the nature of the receipt and the source of funds in determining taxability.