Business income treatment for money-lending receipts, related expenses, loss set-off and unrealised loan interest

Money-lending or similar financing activity carried on as an organised business retains the character of business activity, so receipts from interest and recoveries are assessable as business income rather than income from other sources. Where the establishment is maintained for that business and its recovery efforts, a flat ad hoc disallowance of related expenses is not justified. Earlier years' losses of the same business remain available for set-off. Interest on a loan that has ceased to yield real recovery and is ultimately written off cannot be taxed on accrual basis on a real income approach.

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Issues: (i) Whether the assessee's receipts from interest and recoveries were assessable as business income or as income from other sources; (ii) whether there was justification for ad hoc disallowance of 20% of the establishment expenses; (iii) whether set-off of earlier years' losses was allowable; and (iv) whether interest on the loan to Shri Ramprasad could be brought to tax on accrual basis.

Issue (i): Whether the assessee's receipts from interest and recoveries were assessable as business income or as income from other sources.

Analysis: The assessee had amended its objects to include banking and money-lending, had advanced loans to several parties, and continued recovery efforts during the relevant years while maintaining its establishment for that activity. The activity of advancing money was treated as an organised business activity, and the mere absence of a banking licence did not change the character of the receipts when they were the fruits of that business activity.

Conclusion: The receipts were assessable as business income and not as income from other sources, in favour of the assessee.

Issue (ii): Whether there was justification for ad hoc disallowance of 20% of the establishment expenses.

Analysis: Once the income was held to arise from business activity and the establishment was maintained for recovery and winding up of that business, the related expenditure could not be disallowed on a flat ad hoc basis. The expenditure was connected with the continued business operations and their aftermath.

Conclusion: The ad hoc disallowance of 20% of the establishment expenses was not justified, in favour of the assessee.

Issue (iii): Whether set-off of earlier years' losses was allowable.

Analysis: Since the income was held to be business income, the losses of earlier years retained their business character and were available for set-off in the relevant assessment year.

Conclusion: The set-off of earlier years' losses was allowable, in favour of the assessee.

Issue (iv): Whether interest on the loan to Shri Ramprasad could be brought to tax on accrual basis.

Analysis: The loan had stopped yielding any real recovery, the interest was not realised after a point, and the debt was ultimately written off. In such circumstances, the addition of accrued interest on a non-performing loan was not warranted on the footing of real income.

Conclusion: The interest on the loan to Shri Ramprasad could not be assessed on accrual basis, in favour of the assessee.

Final Conclusion: The reference was answered wholly in favour of the assessee, with all substantive questions decided against the Revenue.

Ratio Decidendi: Where money-lending or similar financing activity is shown to be an organised business activity, the resulting receipts retain the character of business income, related expenditure is allowable, earlier business losses may be set off, and unrealised interest on a finally irrecoverable loan cannot be taxed on accrual basis.

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