2007 (8) TMI 485 - AT - Income Tax

Expenditure incurred in relation to income not includible in total income, Income from other sources

Summary

Issues:
1. Classification of interest income as 'business income' or 'income from other sources'.
2. Disallowance of expenses under section 14A of the Act.

Issue 1: Classification of Interest Income:
The appeal revolved around the classification of interest income earned by an assessee-company as 'business income' or 'income from other sources'. The Assessing Officer had categorized the interest income under 'Income from other sources', disallowing the business loss claimed by the assessee. However, the learned CIT(A) directed to assess the interest income as 'business income', allowing the deduction of expenses claimed by the assessee. The Tribunal analyzed the purpose of the company's incorporation, which was to acquire and hold controlling interest in cement companies. The interest income was earned on surplus funds deposited in fixed deposits, unrelated to the company's business activities. Citing legal precedents, including the judgment in Shree Krishna Polyester Ltd. v. Dy. CIT, the Tribunal concluded that interest earned on surplus funds not immediately required for business is taxable as 'income from other sources'. Therefore, the Tribunal overturned the CIT(A)'s decision and held the interest income as taxable under 'Income from other sources'.

Issue 2: Disallowance of Expenses under Section 14A:
The second ground of appeal concerned the disallowance made by the Assessing Officer under section 14A of the Act. The Assessing Officer disallowed expenses claimed by the assessee, stating that the business activities were confined to share investments, whose income qualified for exemption under section 10(33). However, the CIT(A) deleted the disallowance, as no exempt income was earned by the assessee in that year. The Tribunal examined the conditions for invoking section 14A, emphasizing that the expenditure must be in relation to income not forming part of the total income. As the assessee had not earned any dividend income, and the only income was interest on fixed deposits, the Tribunal held that section 14A was not applicable. Additionally, the Tribunal found that the assessee was indeed carrying on a business of making strategic investments in shares, contrary to the Assessing Officer's view. Consequently, the expenses claimed by the assessee were allowed as deductible under the head 'Profit and gains from business or profession'.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the revenue on the classification of interest income and in favor of the assessee on the disallowance of expenses under section 14A.