2013 (8) TMI 1199 - AT - Income Tax

Defendant Found Liable for Contract Breach, Ordered to Pay Damages Based on Good Faith Principles

The SC upheld the lower court's ruling, finding that the defendant's actions constituted a breach of contract. The court determined that the essential ... - 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the interest income of Rs. 9,62,280/- received from commercial banks should be treated as business income eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act, or as income from other sources.(b) Whether expenses attributable to earning such interest income, including interest paid on borrowings and other expenditures, can be allowed as deductions against this income.(c) Whether the disallowance of Rs. 6,85,79,103/- under Section 43B of the Act, relating to interest payable but not paid, was justified and how the corresponding deduction under Section 80P(2)(a)(i) should be computed.(d) Whether income of Rs. 1,45,22,463/- from sale of immovable property (projects) should be treated as business income or as long-term capital gain, and the consequent tax treatment.(e) Whether an addition of Rs. 49,353/- being interest neither accrued nor received during the year should be taxed and whether it is eligible for deduction under Section 80P(2)(a)(i).2. ISSUE-WISE DETAILED ANALYSISIssues (a) and (b): Treatment of Interest Income from Banks and Allowability of ExpensesThe Tribunal considered whether interest income of Rs. 9,62,280/- received from commercial banks should be treated as business income eligible for deduction under Section 80P(2)(a)(i) or as income from other sources. The Assessing Officer (AO) had treated this interest as income from other sources, disallowing deduction under Section 80P. This was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].The Tribunal noted that the Hon'ble Punjab & Haryana High Court, in the assessee's own case, had held that interest received from banks is income from other sources and not eligible for deduction under Section 80P(2)(a)(i). The counsel for the assessee conceded this point but argued that expenses incurred to earn such interest, including interest paid on borrowings and other business expenses, should be allowed as deductions under Section 57(iii) of the Act.However, on inquiry, it was admitted that the assessee had not borrowed any sum specifically for making fixed deposits (FDRs) in banks; rather, the deposits were made from margin money. The Tribunal referred to the Supreme Court decision in CIT v. Dr. V.P. Gopinath (2001) 248 ITR 449, which held that interest income from fixed deposits cannot be reduced by interest paid on loans taken to make such deposits unless there is a specific legal provision permitting such diminution. Consequently, interest paid on borrowings was not deductible against interest income from FDRs.Regarding other expenses, the Tribunal observed that minimal administrative effort is required to maintain FDRs and thus allowed a reasonable 1% expenditure as was done by the AO. The Tribunal concluded that the AO's and CIT(A)'s treatment was reasonable and did not require interference.Issue (c): Disallowance under Section 43B and Proportionate Deduction under Section 80P(2)(a)(i)The AO disallowed Rs. 6,85,79,103/- under Section 43B for interest payable but not paid during the year. The assessee contended that such disallowance would increase business income and hence the deduction under Section 80P(2)(a)(i) should correspondingly increase. The AO rejected this submission.The CIT(A) partially allowed the appeal by directing the AO to restrict disallowance under Section 43B on a proportionate basis, considering income eligible and not eligible for deduction under Section 80P(2)(a)(i), since it was not possible to segregate the interest payable related to each category of income.Before the Tribunal, the assessee argued that the entire borrowed amount was for business purposes and thus the full deduction under Section 80P(2)(a)(i) should be allowed. The revenue pointed out that some income was from capital gains, which are not eligible for deduction under Section 80P.The Tribunal found that taxable income of Rs. 94,37,145/- was mainly from capital gains, and no evidence was provided about the borrowing related to capital assets. Therefore, the Tribunal upheld the CIT(A)'s order directing proportionate disallowance under Section 43B and proportionate allowance of deduction under Section 80P(2)(a)(i).Issue (d): Treatment of Income from Sale of Immovable Property as Business Income or Capital GainThe AO observed that the assessee's main business objective was to grant loans to urban and rural cooperative housing societies for construction of houses. The assessee treated income of Rs. 1,45,22,463/- from sale of projects (immovable property) as long-term capital gain. The AO, however, treated this income as business income, which was confirmed by the CIT(A).The Tribunal agreed with the AO's reasoning that since the assessee's business involved construction and sale of houses on a regular basis, the income was rightly treated as business income rather than capital gains. The Tribunal dismissed the assessee's ground.Issue (e): Taxation of Interest Not Credited to Profit and Loss AccountThe AO noticed that interest income of Rs. 49,353/- on FDRs was not credited to the profit and loss account as per the audit report and thus taxed the same separately. The assessee challenged this treatment.The Tribunal found this issue identical to the earlier issue regarding interest income from banks (grounds 2 and 3). Following the earlier reasoning, the Tribunal held that this interest income was not eligible for deduction under Section 80P(2)(a)(i) and confirmed the CIT(A)'s order.3. SIGNIFICANT HOLDINGS'Held, that the interest that the assessee received from the bank on the fixed deposit was income in his hands and it could stand diminished only if there was a provision in law permitting such diminution. There was no such provisions of law and the interest on the loan taken from the bank did not reduce his income by way of interest on the fixed deposit.'This principle, drawn from the Supreme Court decision in CIT v. Dr. V.P. Gopinath, was pivotal in rejecting the assessee's claim for deduction of interest paid on borrowings against interest income from fixed deposits.The Tribunal established the core principle that interest income from banks, when not derived from business operations but from passive investments such as fixed deposits, is to be treated as income from other sources and is not eligible for deduction under Section 80P(2)(a)(i) of the Income Tax Act.The Tribunal also clarified that where interest payable under Section 43B is disallowed, and the income comprises both eligible and non-eligible components for deduction under Section 80P, a proportionate approach should be adopted in computing the deduction under Section 80P(2)(a)(i).Finally, the Tribunal confirmed that income arising from the regular sale of immovable properties in the course of business activity should be treated as business income, not as capital gains, thereby denying capital gain benefits to the assessee.