Revenue appeal partly allowed due to shareholding change, interest income netted off as capital work in progress.

ITO, 9 (2) (4), Mumbai Versus M/s. Edelweiss Commodities Services Ltd.

ITO, 9 (2) (4), Mumbai Versus M/s. Edelweiss Commodities Services Ltd. - TMI Issues Involved:
1. Entitlement to set off brought forward losses under Section 79 of the Income Tax Act.
2. Assessment of interest income as income from other sources.

Issue-wise Detailed Analysis:

1. Entitlement to Set Off Brought Forward Losses:
The primary issue revolves around whether the assessee is entitled to set off brought forward losses from the assessment year 2010-11, despite a change in shareholding exceeding 51% during the relevant assessment year 2011-12. The Assessing Officer (AO) disallowed this set off based on Section 79 of the Income Tax Act, which restricts the carry forward and set off of losses if there is a change in shareholding exceeding 49% in a closely held company. The assessee argued that the provisions of Section 79 are not applicable as the acquiring company, M/s Edelweiss Trading and Holding Ltd, is a 100% subsidiary of a listed company, making the assessee a company in which the public are substantially interested. The AO rejected this argument, but the Commissioner of Income Tax (Appeals) [CIT(A)] accepted it and allowed the set off. Upon appeal, the Tribunal held that the status of the company at the time of the shareholding change is crucial. Since the assessee was a closely held company at the time of the change, the provisions of Section 79 applied, and thus, the set off of brought forward losses was disallowed. The Tribunal restored the AO's order on this issue.

2. Assessment of Interest Income:
The second issue pertains to whether the interest income of Rs. 4,74,658/- received from ICICI Bank should be assessed as income from other sources. The AO assessed this interest income separately, while the assessee contended that the interest income, earned on deposits kept for availing a Letter of Credit (L/C) facility for importing equipment for constructing a corporate office, should be netted off against the interest expenditure and capitalized under Capital Work in Progress. The CIT(A) accepted the assessee's contention, referencing the Supreme Court's decisions in Karnal Cooperative Sugar Mills Ltd and Bokaro Steels Ltd, which support the treatment of such interest income as part of the capital work in progress. The Tribunal upheld the CIT(A)'s decision, agreeing that there is a direct link between the fixed deposits and the corporate office construction, justifying the reduction of interest income from the capital work in progress.

Conclusion:
The Tribunal concluded that the appeal by the revenue is partly allowed. The set off of brought forward losses under Section 79 was disallowed, restoring the AO's decision. However, the CIT(A)'s decision to delete the addition of interest income under the head income from other sources was upheld. The order was pronounced in court on 6.6.2018.