2013 (2) TMI 746 - AT - Income Tax

Deduction of interest paid to third party - Whether the income from bank interest on FDRs is to be treated as business income or other sources income - Held that - interest paid to third party has been allowed as deduction after application of rate of profit thus ITO committed no mistake in allowing the interest - Decided in favor of assessee Held that - there is a direct nexus between the interest income as well as the investment - The AO has investigated this issue and has found with reference to Tribunal order and High Court decisions that the interest amount received by the assessee is to be treated as business income on which net profit rate of 8.07% as applied to business income has to be applied to arrive at a taxable income - Hence there is no error in the assessment order and is not prejudicial to the interest of the revenue - Decided in favor of assessee

Issues Involved:
1. Deduction of third-party interest.
2. Classification of interest income from Fixed Deposit Receipts (FDRs).
3. Verification of new creditors/loans.
4. Verification of business receipts from property brokerage.
5. Allowance of depreciation.

Detailed Analysis:

1. Deduction of Third-Party Interest:
The CIT found the assessment for AY 2007-08 erroneous and prejudicial to the interest of revenue because the AO allowed the deduction of third-party interest (Rs. 33,79,844) from net profit without proper verification. The CIT referenced a judgment from the Rajasthan High Court in the case of Shri Ram Jhanwar, which purportedly disallowed such deductions. The assessee argued that the referenced judgment did not pertain to third-party interest and cited other cases where such deductions were allowed. The Tribunal noted that the AO had relied on the Special Bench decision in Dy. CIT vs. Allied Construction, which supported the deduction of third-party interest. The Tribunal found that the AO's decision was one of the possible views and thus could not be revised under s. 263 simply because the CIT had a different view.

2. Classification of Interest Income from FDRs:
The CIT contended that the AO erroneously treated interest income from FDRs (Rs. 19,50,875) as business income instead of income from other sources. The assessee argued that the FDRs were necessary for business operations, such as securing contracts, and thus the interest should be considered business income. The Tribunal found that the AO had investigated this issue and had followed precedents that treated such interest as business income. Therefore, the Tribunal concluded that the AO's decision was not erroneous and could not be revised under s. 263.

3. Verification of New Creditors/Loans:
The CIT noted that the AO had not properly examined and verified new creditors/loans amounting to Rs. 13,50,000 introduced during the year. The assessee requested more information from the CIT to respond adequately. The Tribunal did not find any specific findings or errors by the AO on this issue that would justify revision under s. 263.

4. Verification of Business Receipts from Property Brokerage:
The CIT also claimed that the AO did not verify the business receipts from property brokerage and the investment in a residential property. The assessee again requested more details to respond. The Tribunal found no substantial errors or omissions by the AO that would warrant revision under s. 263.

5. Allowance of Depreciation:
The CIT found the assessment order erroneous on the ground of allowance of depreciation, even though this was not included in the show-cause notice. The Tribunal noted that revising an order on grounds not mentioned in the show-cause notice is not permissible. Therefore, this action by the CIT was unjustifiable.

Conclusion:
The Tribunal concluded that the AO had taken one of the possible views on the issues of third-party interest and interest from FDRs, supported by precedents. Hence, the assessment orders for AY 2007-08 and 2008-09 were not erroneous and prejudicial to the interest of revenue. The Tribunal set aside the CIT's orders and restored the AO's assessments for both years. The appeals were allowed in favor of the assessee.

← Previous Next →