Tribunal allows set-off of interest income against expenditure, classifies it as business income

The Tribunal ruled in favor of the assessee, directing the AO to allow the set-off of interest income against interest expenditure. It classified interest income from short-term fixed deposits as business income, emphasizing the deposits' role in managing the business's working capital. Additionally, the Tribunal instructed the AO to consider prior period expenses in the respective years they relate to, partly allowing the assessee's appeal on this issue. The judgment was pronounced on 13/6/2022.

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Issues Involved:
1. Classification of interest income from short-term fixed deposits.
2. Disallowance of prior period expenses.

Issue 1: Classification of Interest Income from Short-Term Fixed Deposits

The primary contention was whether the interest income from short-term fixed deposits should be classified as "income from business" or "income from other sources." The assessee argued that the deposits were short-term, ranging from 10 to 91 days, and were made to manage excess funds in a "Flexi Account" where the bank automatically transferred surplus funds to fixed deposits. The assessee claimed this interest as "business income" since it was closely linked to the business operations and used to offset business expenses, specifically interest on loans.

The Revenue, however, treated this interest income as "income from other sources." The CIT(A) partially agreed with the assessee, treating some interest types as business income but classified interest from fixed deposits, SLDC Development Fund, and Flexi Account as "income from other sources."

The Tribunal considered the short-term nature of the deposits and the necessity for the assessee to manage its financial obligations efficiently. It emphasized that the deposits were not surplus funds but part of the business's working capital. Consequently, the Tribunal ruled in favor of netting the interest income against the interest expenditure, drawing support from the Supreme Court's decision in National Cooperative Development Corporation vs. CIT, which emphasized determining real income based on commercial principles. Thus, the Tribunal directed the AO to allow the set-off of interest income against interest expenditure.

Issue 2: Disallowance of Prior Period Expenses

The assessee argued that it incurred certain expenses in previous years but received the intimation later, leading to their claim in the current year. These included depreciation due to demerger from GRIDCO, pay arrears, house rent, leave salary, and bonus arrears. The assessee suggested that if these expenses couldn't be allowed in the current year, they should be considered for the respective earlier years.

The Revenue contended that these expenses were known to the assessee in earlier years and should have been claimed then. The CIT(A) upheld the AO's disallowance of these expenses in the current year.

The Tribunal acknowledged that, per Section 32 of the Income Tax Act, depreciation is mandatory whether claimed or not. Given the demerger from GRIDCO, the depreciation figures for earlier years might not have been available to the AO. Therefore, the Tribunal restored the issue to the AO, directing them to allow these expenses in the respective earlier years they relate to, thus partly allowing the assessee's appeal on this issue.

Conclusion

The appeals were partly allowed for statistical purposes, with the Tribunal directing the AO to set off the interest income against interest expenditure and to consider prior period expenses in the respective years they pertain to. The judgment was pronounced in the open court on 13/6/2022.

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