2003 (7) TMI 290 - AT - Income Tax

Tribunal Overrules CIT: AO's Classification of Interest Income as Tax-Exempt Business Income Upheld.

The Tribunal quashed the CIT's order under Section 263, concluding that the AO had conducted due inquiries and appropriately applied his mind in ... Interest or dividend income can be treated as income from the industrial undertaking - Revision of orders prejudicial to interest of revenue - Whether the CIT erred in setting aside the AO's order u/s 143(3) for the assessment year 1993-94 - HELD THAT:- From the facts, it is evident that the AO has applied his mind to the facts of the case and had treated the interest income of Rs. 4,85,861 received from M/s Wolkem India Ltd. as business income. Therefore, we do not agree with the view of the learned CIT that the AO had not made due inquiries and had not applied his mind to the facts of the case. The learned CIT had also relied upon the judgement of the Hon’ble Rajasthan High Court in the case of Murli Investment Co. vs. CIT [1986 (9) TMI 43 - RAJASTHAN HIGH COURT] wherein income derived from surplus fund was not considered as business income. It is evident from the fact of the case that in the case of Murli Investment Co. vs. CIT surplus funds had been deposited with the third party. Therefore, that was not considered as business income whereas, as is evident from p. 2 of the order of the AO and the submission of the learned authorised representative that the assessee is having regular business dealings of purchases from M/s Wolkem India Ltd. which takes advances from the assessee on sales made by it to the assessee and, therefore, only this interest income could be considered as income from industrial undertaking as the same has arisen during the course of regular business and, therefore, the sum of Rs. 4,85,861 would be treated as income of the 100 per cent export-oriented unit. The learned authorised representative during the course of hearing had rightly placed reliance on the case of CIT vs. Paramount Premises (P) Ltd.[1990 (9) TMI 33 - BOMBAY HIGH COURT] wherein it was held that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Therefore, the interest income earned from M/s Wolkem India Ltd. was rightly held to be income from business by the AO. Thus twin conditions for exercise of jurisdiction under s. 263, i.e., (i) the order of the AO is erroneous; and (ii) that it is prejudicial to the interest of the Revenue are not satisfied. Therefore, order passed by the learned CIT under s. 263(1) of the Act. is hereby quashed. In the result, the appeal is allowed. Issues Involved:1. Whether the CIT was justified in setting aside the AO's order under Section 143(3) for the assessment year 1993-94.2. Whether the interest income of Rs. 4,85,861 received from M/s Wolkem India Ltd. should be considered as business income exempt under Section 10B of the IT Act, 1961.3. Whether the AO made due inquiries and applied his mind in assessing the interest income from M/s Wolkem India Ltd.Issue-wise Detailed Analysis:1. Justification of CIT's Action under Section 263:The appellant contended that the CIT erred in setting aside the AO's order under Section 143(3) for the assessment year 1993-94. The CIT issued a show-cause notice under Section 263, considering the AO's acceptance of the interest income from M/s Wolkem India Ltd. as business income to be erroneous and prejudicial to the interest of Revenue. The CIT rejected the appellant's argument that the issue was already a subject matter of appeal before the CIT(A), stating that mere reference to the interest income in the appellate order did not preclude invoking Section 263. The CIT concluded that the AO had taken an erroneous view without due inquiries regarding the interest income from M/s Wolkem India Ltd.2. Classification of Interest Income from M/s Wolkem India Ltd.:The appellant argued that the interest received from M/s Wolkem India Ltd. was business income, as the firm required advances against the supply of raw materials, and the interest was paid on surplus balances. The AO accepted this view and treated the interest income of Rs. 4,85,861 as business income exempt under Section 10B. However, the CIT considered this view erroneous, relying on the decision of the Rajasthan High Court in Murli Investment Co. vs. CIT, where income derived from surplus funds was not considered business income. The CIT concluded that the AO's view was erroneous and prejudicial to the interest of Revenue.3. Due Inquiries and Application of Mind by AO:The appellant argued that the AO made due inquiries and applied his mind in assessing the interest income from M/s Wolkem India Ltd. The AO observed that the interest income was received during the normal course of business and treated it as business income exempt under Section 10B. The CIT, however, alleged that the AO did not make due inquiries and did not apply his mind to the facts and circumstances of the case. The appellant relied on the judgment of the Bombay High Court in CIT vs. Gabriel India Ltd., which held that an AO's order cannot be termed erroneous if he applied his mind and made inquiries. The Tribunal found that the AO had made due inquiries and applied his mind, and therefore, disagreed with the CIT's view.Conclusion:The Tribunal concluded that the AO had made due inquiries and applied his mind in treating the interest income from M/s Wolkem India Ltd. as business income exempt under Section 10B. The CIT's order under Section 263 was quashed as the twin conditions for exercising jurisdiction under Section 263, i.e., the order being erroneous and prejudicial to the interest of Revenue, were not satisfied. The appeal was allowed in favor of the appellant.