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2006 (8) TMI 332 - AT - Income TaxDeduction u/s 36(1)(viii) - Bad debts - derived from - interest on investment and on deposits, lease, income and guarantee fees - taxable under the head income from other sources and not as business income - HELD THAT - In the instant case, it is not in dispute that the assessee is engaged in the business of long term finance for inter alia development of infrastructure facility in India. Once the income can be said to be derived from such business the assessee becomes eligible to the benefit u/s 36(1)(viii) of IT Act. This means that any profits and gains derived by the assessee from such businesses of long term finance of the assessee is only eligible for deduction under section 36(1)(viii) of the Act, as discussed by us on the basis of detailed discussions while arriving at the meaning of the words/phrase derived from used in section 36(1)(viii) as well as in other sections i.e. 80HH, 80-I and 80J. According to the assessee the same was eligible for the relief u/s 36(1)(viii) of I.T. Act as the interest income from such investments and deposits were made firstly because all such funds required for the business activity were lying idle and hence invested in short term deposits and further because these invests were made out of business compulsion or business necessity like providing bank guarantees for certain transactions, for opening LC for export purpose, for getting the facility and services of Government departments and lastly these deposits had to be made otherwise the business activity could not be carried on by the assessee. Hence in view of our detailed discussion and conclusions drawn thereon the order of Assessing Officer in disallowing the benefit u/s 36(1)(viii) in respect of interest income on deposits, from investments, ICDs and guarantee fee is upheld and the order of the CIT(A) in allowing the benefit u/s 36(1)(viii) in respect of interest earned on the amounts deposited by the assessee for a period of three months disbursement for the succeeding period and the guarantee fee earned by the assessee is set aside and the other part of the order of the CIT(A) in allowing the benefit u/s 36(1)(viii) to the assessee in respect of lease income is upheld. Consequently the first issue stands partly decided against the assessee and partly against the revenue. We hold that the interest earned by the assessee on deposits or investments out of business necessity and out of compulsion can be held to be interest income earned by the assessee from business or attributable to business but the interest earned on investments or deposits beyond a period of three months were not from business and are to be treated as income from other sources on which expenditure cannot be allowed. Hence, we conclude that in the existing facts and circumstances the interest earned by the assessee on short term deposits and investments for a period of three months out of compulsion and business necessity as well as interest earned on ICDs and guarantees as guarantee fee was an integral part of the business activity of the assessee and therefore the same cannot be treated as income from other sources and is to be considered under the head business income. We further find that though the CIT(A) had made such observations which have been upheld by us hereinabove treating the same to be very logical and reasonable but we find that no such directions were issued by the CIT(A) in his order, so, now, while upholding the order of the CIT(A) to the extent as observed hereinabove by us, we restore the issue to the file of Assessing Officer for considering the expenses incurred by the assessee for such income of interest and guarantee fee as has been held by us to be business income after examining each expense and see its applicability to the earning of such income and thereafter considered the allowability of the same to the assessee. Bad and doubtful debt - In the case of United Commercial Bank v. CIT 1999 (9) TMI 4 - SUPREME COURT , the Apex Court observed that once a particular entry is made as per the mandate of applicable directive, debit as such does not defeat the claim and this observation of the Apex Court when applied to the facts of the instant case of the assessee is indicative of the fact that mere debit in the appropriation account by the assessee would not disentitle the assessee from claiming deduction when the same is permissible to it under the provisions of section 36(1)(viia)(c) of the Act, more so, when the same has consistently been allowed by the department since 1990-91 to 1995-96 based on the provision created in the books of account. Thus, we find no merits in the order of CIT(A) in confirming the impugned addition made by the Assessing Officer and so the order of CIT(A) in this regard is set aside and Ground No. 4 of the assessee s appeal is allowed. In the light of our findings recorded hereinabove the Ground Nos. 1, 2 and 3 of the assessee s appeal and Ground No. 7 of the Revenue s appeal stand partly allowed in the manner as indicated in this order and Ground No. 4 of the appeal of the assessee are allowed. In the result, the instant appeals of the assessee as well as that of revenue are partly allowed.
Issues Involved:
1. Validity of the CIT(A)'s order. 2. Deduction under section 36(1)(viii) for interest on investments and deposits. 3. Classification of income from interest on investments and deposits as 'income from other sources' or 'business income.' 4. Disallowance of claim under section 36(1)(viia)(c). 5. Disallowance of depreciation claim. 6. Levy of interest under section 234C. 7. Initiation of proceedings under section 271(1)(c). Issue-wise Detailed Analysis: 1. Validity of the CIT(A)'s Order: The assessee challenged the validity of the CIT(A)'s order both in law and on facts. The Tribunal did not provide a separate analysis for this issue, implying that it was not the primary focus of the judgment. 2. Deduction under Section 36(1)(viii) for Interest on Investments and Deposits: The Tribunal examined whether the assessee was entitled to a deduction under section 36(1)(viii) for interest on investments and deposits, lease income, and guarantee fees. The assessee argued that these incomes were integral to its business of providing long-term finance and thus qualified for the deduction. However, the Tribunal, relying on various judicial precedents, concluded that the term "derived from" necessitates a direct nexus between the income and the business of providing long-term finance. The Tribunal held that interest income from investments, deposits, and guarantee fees did not have this direct nexus and thus did not qualify for the deduction. The lease income, however, was considered integral to the business of providing long-term finance and was eligible for the deduction. 3. Classification of Income from Interest on Investments and Deposits as 'Income from Other Sources' or 'Business Income': The Tribunal addressed whether the income from interest on investments and deposits should be classified as 'income from other sources' or 'business income.' It was held that interest earned on short-term deposits and investments made out of business necessity could be considered business income. However, interest earned on investments or deposits beyond three months was to be treated as income from other sources. The Tribunal directed the Assessing Officer to examine the expenses related to such income and determine their applicability. 4. Disallowance of Claim under Section 36(1)(viia)(c): The Tribunal considered the assessee's claim for a deduction under section 36(1)(viia)(c) for provision for bad and doubtful debts. The Assessing Officer had disallowed the claim on the grounds that the provision was not made in the profit and loss account but in the appropriation account. The Tribunal found that the assessee had consistently been allowed such deductions in previous years and that the presentation in the appropriation account was based on the mandate of the Comptroller & Auditor General (CAG). The Tribunal concluded that the deduction should be allowed, setting aside the disallowance by the Assessing Officer and the CIT(A). 5. Disallowance of Depreciation Claim: The Tribunal did not provide a detailed analysis of the disallowance of the depreciation claim, indicating that this issue was not a primary focus of the judgment. 6. Levy of Interest under Section 234C: The Tribunal did not provide a detailed analysis of the levy of interest under section 234C, indicating that this issue was not a primary focus of the judgment. 7. Initiation of Proceedings under Section 271(1)(c): The Tribunal did not provide a detailed analysis of the initiation of proceedings under section 271(1)(c), indicating that this issue was not a primary focus of the judgment. Conclusion: The Tribunal's judgment partly allowed the appeals of both the assessee and the Revenue. The key findings included the denial of the deduction under section 36(1)(viii) for interest on investments and deposits and guarantee fees, the classification of certain interest income as business income, and the allowance of the deduction for provision for bad and doubtful debts under section 36(1)(viia)(c). The Tribunal directed the Assessing Officer to re-examine the expenses related to the income classified as business income.
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