2015 (6) TMI 1198 - AT - Income Tax

Interest on special fund investments not taxable for assessee, Tribunal affirms CIT(A) order.

Asst. Commissioner of Income- tax, Karimnagar Versus M/s Cooperative Electric. Supply Society Ltd.,

Asst. Commissioner of Income- tax, Karimnagar Versus M/s Cooperative Electric. Supply Society Ltd., - TMI Issues Involved:1. Whether the interest earned on 'special fund investments' is taxable in the hands of the assessee.2. Whether the CIT(A)'s order is against the provisions of the IT Act, 1961.Issue-wise Detailed Analysis:1. Taxability of Interest on Special Fund Investments:The primary issue in these appeals is whether the accrued interest on investments made by the assessee from the loan amount received from the Rural Electrification Corporation (REC) is taxable in the hands of the assessee. The assessee, a cooperative society engaged in the purchase, supply, and distribution of electrical energy, did not show the accrued interest income in its Profit & Loss Account but instead showed it as a liability in its balance sheet. The Assessing Officer (AO) treated the interest amount as income of the assessee for the relevant assessment years, based on the precedent of similar treatment in previous years (1999-2000 to 2006-07).Upon appeal, the CIT(A) referenced the decision of the ITAT, Hyderabad Bench, which had previously ruled that the interest accrued on the special fund created as per REC's directions is not taxable in the hands of the assessee but is the income of REC. The CIT(A) deleted the addition made by the AO, noting that the Tribunal's decision had not been stayed by the High Court.The Tribunal upheld the CIT(A)'s decision, emphasizing that the issue is covered by the earlier decision of the ITAT in the assessee's own case. The Tribunal reiterated that the assessee is merely a custodian of the special fund, and the ownership of the fund, including the interest accrued, remains with REC. The Tribunal noted that the special fund is managed and operated by the society under strict rules framed by REC, which include provisions for the use of the fund and the requirement of REC's authorization for withdrawals. The Tribunal concluded that there is no diversion of income by overriding title in favor of the assessee, and thus, the interest income does not accrue to the assessee.2. CIT(A)'s Order Against IT Act, 1961:The department contended that the CIT(A)'s order is against the provisions of the IT Act, 1961. However, the Tribunal found no merit in this contention. The Tribunal noted that the AO's refusal to follow the ITAT's decision based on the department's challenge to the High Court is not a valid ground. The Tribunal emphasized that the decision of the ITAT is binding on the AO unless stayed or overturned by a higher authority. The Tribunal found that the CIT(A) correctly followed the ITAT's earlier decision, which remains binding and applicable to the facts of the current assessment years under consideration.Conclusion:The Tribunal dismissed the department's appeals, upholding the CIT(A)'s order that the interest accrued on the special fund investments is not taxable in the hands of the assessee. The Tribunal affirmed that the CIT(A)'s order is consistent with the ITAT's earlier decision and the provisions of the IT Act, 1961. The department's contention that the interest income has not been shown by REC does not justify taxing it in the hands of the assessee.Result:All appeals by the department were dismissed. The judgment was pronounced in the open court on 19th June, 2015.