2017 (5) TMI 1416 - AT - Income Tax

Appeals allowed for tax reconsideration under Section 67A, emphasizing AOP income computation.

The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO to reconsider the taxability of the interest income in ... Interest income as a member of the AOP - Method of computing a member’s share in income of association of persons or body of individuals - Held that:- As per section 67A, the total income of the AOP from all the heads of income should be computed and, then, any salary, interest, bonus, commission or remuneration paid to member of the AOP shall be deducted from the total income of the AOP. Balance, if any, should be apportioned in the hands of members of the AOP in proportionate to their share holding ratio in the AOP. The share of profit or loss and the salary, remuneration, interest etc. paid to the member of the AOP constitute the share income of the member which should be brought to tax in the hands of the assessee since the shares of the AOP are determinate. In the instant case assessee is member of AOP and received interest as member of the AOP, hence as per section 67A, the income has to be computed in the hands of AOP and the share income has to be brought to tax in the hands of member of AOP. This issue has not been considered by this AO or CIT(A). Therefore, we are of the considered opinion that the issue should be remitted back to the file of the AO to consider taxing the share income of the assessee as per the provisions of section IT Act. This view is supported by the Hon’ble MP High Court decision in the case of CIT Vs. D&H Secheron Electrodes Ltd. [2005 (1) TMI 92 - MADHYA PRADESH High Court]. Accordingly, we set aside the issue in dispute to the file of the AO with a direction to compute the income of the AOP and the share income of the AOP in the hands of the Members of AOP i.e. assessee. Accordingly, the additional ground raised by the assessee is allowed for statistical purposes. Issues Involved:1. Taxability of interest income earned by the assessee from unutilized investments.2. Treatment of interest income in the context of capital work-in-progress (WIP).3. Applicability of Section 67A of the Income Tax Act for computing the income of the assessee as a member of an Association of Persons (AOP).Detailed Analysis:1. Taxability of Interest Income Earned by the Assessee from Unutilized Investments:The primary issue in the appeals was whether the interest income earned by the assessee from unutilized investments should be taxed as 'income from other sources.' The assessee argued that the interest income credited by the joint venture (GSG DRDL Consortium) should not be taxed as it was not received and was uncertain due to ongoing arbitration. The Assessing Officer (AO) contended that since the assessee follows the mercantile system of accounting, the accrued interest must be accounted for, regardless of actual receipt. The AO emphasized that unless there is an inextricable link between the receipt of interest and the business, the interest income cannot be related to business income and must be treated as income from other sources. This view was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who noted that the interest income from unutilized funds should be taxed as income from other sources, as the business had not commenced.2. Treatment of Interest Income in the Context of Capital Work-in-Progress (WIP):The assessee claimed that the interest income should reduce the capital WIP, arguing that the interest was earned on funds contributed to the joint venture for a development project. The AO and CIT(A) rejected this claim, stating that the interest income could not be linked to the business of the assessee as the business had not commenced. The CIT(A) relied on the decision of the ITAT, Hyderabad in the case of M/s Kakinada SEZ Pvt. Ltd., which held that interest earned from unutilized funds is to be assessed as income from other sources. The CIT(A) further observed that the interest income should be treated as income from other sources, irrespective of whether the funds were own or borrowed, as the business had not started.3. Applicability of Section 67A of the Income Tax Act for Computing the Income of the Assessee as a Member of an Association of Persons (AOP):The assessee raised an additional ground, arguing that any income received from the AOP, including interest, should be assessed in accordance with Section 67A of the Income Tax Act. The Tribunal admitted this additional ground, noting that it goes to the root of the assessment. Section 67A prescribes the method for computing a member's share in the income of an AOP. The Tribunal observed that the total income of the AOP should be computed under different heads, and any interest, salary, bonus, commission, or remuneration paid to a member should be deducted from the total income of the AOP. The balance should then be apportioned among the members according to their shareholding ratio. The Tribunal remitted the issue back to the AO to compute the income of the AOP and the share income of the assessee as a member of the AOP, in accordance with Section 67A. This decision was supported by the Hon’ble MP High Court in the case of CIT Vs. D&H Secheron Electrodes Ltd.Conclusion:The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO to reconsider the taxability of the interest income in light of Section 67A. The Tribunal did not adjudicate the original grounds raised by the assessee, as the additional ground was deemed sufficient to address the core issue. The decision emphasized the importance of adhering to the provisions of Section 67A in computing the income of members of an AOP.