2011 (8) TMI 1132 - AT - Income Tax

Nature of income - Held that - Assessee has earned interest on bank deposit and share application money amounting to Rs. 14, 39, 68, 000/-. The said income has declared as business income which the AO has treated as income from other sources being interest earned on surplus funds. We find that the assessee was not engaged in money lending business and the interest was earned by parking surplus funds in banks and with other (share application money). Hence the same cannot be chargeable under the head income from business and profession and can be treated as only income from other sources. Hence we confirm the order of the Ld. CIT(A) and dismiss the appeal of the assessee on this issue.

Summary

Issues Involved:
1. Applicability of Section 14A read with Rule 8D for disallowance of expenses incurred on earning exempted income.
2. Addition of disallowed expenses under Section 14A to book profit for the purpose of Section 115JB.
3. Classification of interest income from bank deposits and share application money as 'Income from Business' or 'Income from Other Sources.'

Issue-wise Detailed Analysis:

1. Applicability of Section 14A read with Rule 8D for disallowance of expenses incurred on earning exempted income:
The assessee, National Commodity & Derivatives Exchange Ltd. (NCDEX), earned a dividend income of Rs. 2,83,48,515/- from various Mutual Funds, which is exempt under Section 10(35) of the Income Tax Act. The Assessing Officer (AO) disallowed Rs. 1,20,17,380/- under Section 14A read with Rule 8D, attributing it to expenses incurred for earning the exempt income. The assessee contended that minimal expenses were incurred, primarily involving the salary of one finance department employee. However, the AO applied the formula under Rule 8D, calculating the disallowance based on the average value of investments and total assets. The CIT(A) upheld the AO's decision, stating that Section 14A and Rule 8D are applicable and mandatory for calculating disallowance. Upon appeal, the Tribunal referenced a similar case involving the National Stock Exchange, where the expenditure was estimated at 1% of the income. Respectfully following this precedent, the Tribunal directed the AO to make a disallowance of only 1%, allowing this ground partly for statistical purposes.

2. Addition of disallowed expenses under Section 14A to book profit for the purpose of Section 115JB:
The AO added Rs. 1,20,17,380/-, representing the disallowed expenses under Section 14A, to the book profit while computing it under Section 115JB. The CIT(A) upheld this addition, citing Clause (f) of Explanation 1 to Section 115JB, which mandates increasing the book profit by the amount of expenditure related to exempt income. However, the Tribunal found that Rule 8D is not applicable for the assessment year in question and no actual expenditure was debited in the profit & loss account for earning the exempt income. Thus, the provisions of Section 14A could not be applied while computing book profit under Section 115JB. The Tribunal referenced the ITAT Delhi Bench decision in Goetze (India) Ltd. vs. CIT, which held that Section 14A provisions cannot be imported into Clause (f) of Explanation to Section 115JA. Consequently, the Tribunal deleted the disallowance of expenses from the book profit computation, deciding this ground in favor of the assessee.

3. Classification of interest income from bank deposits and share application money as 'Income from Business' or 'Income from Other Sources':
The assessee declared interest income of Rs. 14,39,68,000/- from bank deposits and share application money as business income. The AO, however, classified it as income from other sources, arguing that the assessee was not engaged in money lending and the interest was earned by parking surplus funds. The CIT(A) upheld the AO's decision, stating there was no nexus between the interest receipts and the assessee's business activities. The Tribunal agreed with the AO and CIT(A), confirming that the interest income should be treated as income from other sources, as it was earned from surplus funds and not from business activities. Thus, the appeal on this issue was dismissed.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing a 1% disallowance under Section 14A, deleting the addition to book profit under Section 115JB, and confirming the classification of interest income as income from other sources.