2006 (1) TMI 451 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of interest income under the head "Income from other sources" versus "Income from business."
2. Reduction of deduction under section 80-I due to reclassification of interest income.
3. Disallowance of depreciation on TG & QQ equipment.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income under "Other Sources":
The primary issue was whether the interest income should be classified under "Income from other sources" or "Income from business." The assessee claimed the interest income as business income, arguing that the interest earned on inter-corporate deposits was intimately connected with the business operations and supported by the Memorandum of Association empowering the company to lend money. The Assessing Officer (AO) rejected this claim, treating the interest as income from other sources, citing that the interest was received on short-term bank deposits, which did not constitute the business of the assessee. The CIT(A) upheld the AO's decision, emphasizing that the deployment of temporary investments had no direct or indirect connection with the priority industry and that the interest income was not inextricably linked to the business of the assessee. The Tribunal, relying on previous decisions, including the assessee's own case for the assessment year 1995-96 and the Hon'ble Bombay High Court's decision in Shree Krishna Polyster Ltd., confirmed that interest income from surplus funds should be assessed under "Income from other sources."

2. Reduction of Deduction under Section 80-I:
The second issue was consequential to the first. Once it was determined that the interest income was not business income, it was excluded from the computation of business profit. Consequently, the deduction under section 80-I was reduced. The Tribunal confirmed the CIT(A)'s order on this issue, rejecting the assessee's ground.

3. Disallowance of Depreciation on TG & QQ Equipment:
The dispute involved the disallowance of depreciation on TG & QQ equipment purchased from a sister concern, VGWL. The AO invoked Explanation 3 to section 43(1), rejecting the cost paid by the assessee and adopting the Written Down Value (WDV) in the hands of VGWL as the cost for depreciation purposes. The CIT(A) upheld the AO's decision, highlighting that the consideration paid was more than the market value, VGWL was a loss-making company with accumulated losses, and the technology of the equipment was outdated. The Tribunal directed the AO to provide the DVO's report to the assessee and re-examine the issue, considering the DVO's report and other relevant factors, including the financial condition of both companies, the intention behind the transfer, and the basis of valuation. The Tribunal emphasized that the DVO/AVO reports are not binding and that the AO should objectively examine these reports and other circumstances to determine the fair cost of the equipment for depreciation purposes.

Conclusion:
The Tribunal upheld the reclassification of interest income under "Income from other sources," leading to a reduction in the deduction under section 80-I. However, it remanded the issue of depreciation on TG & QQ equipment back to the AO for fresh consideration, directing a thorough examination of the DVO's report and other relevant factors. The appeal of the assessee was allowed in part, with specific directions for re-evaluation of the depreciation claim.