2011 (5) TMI 1013 - AT - Income Tax

Summary

Issues Involved:
1. Addition of interest income on rights assigned by a bank in a pending suit.
2. Rate of interest adopted by the AO.
3. Head of income under which the interest income is to be taxed.
4. Set-off of brought forward losses against interest income.
5. Deduction of expenditure against interest income.
6. Validity of reopening of assessments.
7. Disallowance under Section 14A.
8. Treatment of trading in shares as speculative activity.

Detailed Analysis:

1. Addition of Interest Income on Rights Assigned by a Bank in a Pending Suit:
The main issue in these appeals pertains to the addition made by the AO and confirmed by the CIT(A) on account of interest income on the amount claimed to be paid by the assessee for rights assigned by a bank in a pending suit. The assessee company, involved in an investment business, acquired rights from Bank of Baroda to recover debts from defaulters. The AO held that the assessee should have accounted for interest on the said debt on an accrual basis at a minimum rate of 18% per annum. The CIT(A) confirmed this addition, holding that the transaction was not a business activity but an acquisition of debt, thus taxable under "Income from Other Sources."

2. Rate of Interest Adopted by the AO:
The AO adopted an interest rate of 18% per annum for computing the interest income accrued to the assessee. The CIT(A) upheld this rate, rejecting the assessee's contention that the rate was excessive and that the interest income should be taxed as business income.

3. Head of Income Under Which the Interest Income is to be Taxed:
The CIT(A) upheld the AO's decision to tax the interest income under "Income from Other Sources" rather than as business income. The CIT(A) reasoned that the assessee's activity did not constitute a business activity but was a single instance of acquiring debt.

4. Set-Off of Brought Forward Losses Against Interest Income:
The CIT(A) allowed the assessee's claim for deduction on account of interest expenses incurred in respect of funds borrowed from directors for making payment to the Bank of Baroda, under Section 57 of the Act. However, the AO's decision on the set-off of brought forward losses against interest income was not explicitly addressed in the judgment.

5. Deduction of Expenditure Against Interest Income:
The CIT(A) directed the AO to allow the deduction of interest expenditure incurred by the assessee in respect of funds borrowed from directors, which had a direct nexus with the interest income accrued to the assessee.

6. Validity of Reopening of Assessments:
The assessee challenged the validity of reopening assessments for the years 2001-02 to 2004-05. However, this issue was not pressed by the assessee's counsel during the hearing, and the relevant grounds of appeals were dismissed as not pressed.

7. Disallowance Under Section 14A:
The AO and CIT(A) made disallowances under Section 14A by applying Rule 8D of the Income-tax Rules, 1962. The Tribunal set aside the CIT(A)'s order on this issue and restored the matter to the AO to determine the quantum of disallowance by adopting a reasonable method, following the Bombay High Court's decision in Godrej Boyce Manufacturing Co. Ltd.

8. Treatment of Trading in Shares as Speculative Activity:
The AO and CIT(A) treated the assessee's activity of trading in shares as speculative, invoking Explanation to Section 73. The Tribunal upheld this treatment, following the Bombay High Court's decision in CIT vs. Lokmat Newspaper P. Ltd., which held that the Explanation to Section 73 creates a deeming fiction that treats the purchase and sale of shares by companies as speculative business.

Conclusion:
The Tribunal set aside the CIT(A)'s orders on the main issue of interest income and related consequential issues, restoring them to the AO for fresh consideration. The Tribunal upheld the CIT(A)'s decisions on the treatment of trading in shares as speculative and the disallowance under Section 14A, directing the AO to adopt a reasonable method for the latter. The appeals were partly allowed for statistical purposes, and the Revenue's appeals were allowed for statistical purposes.