2013 (2) TMI 840 - AT - Income Tax

Summary

Issues Involved:
1. Head of taxability of income: 'business income' or 'income from capital gain'.
2. Disallowance of interest u/s 36(1)(iii).

Summary:

Issue 1: Head of Taxability of Income
The primary issue was whether the income from the sale of plots should be taxed as 'business income' or 'income from capital gain'. The assessee, a private limited company engaged in the hotel business, entered into a Development Agreement with M/s. Ess Gee Real Estate Developers to develop a residential colony named Umaid Heritage. The A.O. argued that the activities of sale of plots should be treated as 'adventure in the nature of trade' and taxed as business income, citing the Memorandum of Association and the nature of the development activities. The assessee contended that the land was held as a long-term capital asset and the income should be taxed under the head 'capital gains'. The Tribunal, after reviewing various judicial precedents, concluded that the intention at the time of acquisition, treatment in financial statements, and period of holding were crucial factors. The Tribunal found that the land was held as a capital asset and the income from its sale should be taxed as 'capital gains'.

Issue 2: Disallowance of Interest u/s 36(1)(iii)
The second issue was the disallowance of interest u/s 36(1)(iii) on the grounds that the assessee had advanced interest-free loans to its sister concerns. The A.O. disallowed interest expenditure equivalent to 12% of the interest income on the grounds of deemed income from the security deposit and advances to its sister concerns. The assessee argued that the advances were made out of its own funds and not borrowed funds, and were for business considerations. The Tribunal, citing the jurisdictional High Court's decision in the assessee's own case, held that the burden of proof was on the A.O. to show that borrowed funds were diverted. The Tribunal found that the advances were made out of the assessee's own funds and allowed the interest expenditure.

Conclusion:
The Tribunal allowed the appeals of the assessee, holding that the income from the sale of plots should be taxed as 'capital gains' and not 'business income', and the disallowance of interest u/s 36(1)(iii) was not justified.