2011 (11) TMI 193 - AT - Income Tax

Interest income earned on refund of earnest money real estate - income from other sources vs income from business interest bearing unsecured loan received for depositing earnest money - set off interest paid from the interest income - entitlement of carry forward of losses participated in tender within months of incorporation Held that - The participation in the tender is starting of one activity which enable the assessee to acquire the land for development. The actual development of the land is immaterial for construing that business of the assessee has been set up. The investment of Rs. 186 crores was not as a deposit out of surplus fund rather it was earnest money paid by the assessee for the purchase of land. Thus, assessee has demonstrated that its business was set up during the accounting period relevant for this assessment year. Therefore, income of the assessee has to be assessed under the head business income and consequently loss computed by allowing interest expenditure against interest income deserves to be permitted for carry forward. - Decided in favor of assessee.

Summary

Issues:
Assessment of income under the head "income from other sources" vs. "profit and gains of business or profession"; Allowance of net business loss carry forward; Treatment of interest income and expenses.

Analysis:
1. Assessment of Income Category:
The dispute revolved around whether the income of the assessee should be categorized as "income from other sources" or "profit and gains of business or profession." The assessee argued that its business of real estate development was set up during the relevant accounting period, entitling it to claim business income status. The appellate authority agreed, emphasizing that participation in a tender marked the initiation of business activities, regardless of actual development. The tribunal held in favor of the assessee, allowing the carry forward of the net business loss.

2. Net Business Loss Carry Forward:
The assessee contended that the net business loss of Rs. 1,17,12,473 should be carried forward, but the revenue disputed this claim. The tribunal ruled in favor of the assessee, permitting the carry forward of the loss as the business was deemed to be set up during the relevant period, justifying the allowance.

3. Treatment of Interest Income and Expenses:
Regarding interest income and expenses, the Assessing Officer disallowed the claimed interest expenses of Rs. 1,79,37,534, assessing the interest earned as income from other sources. The appellate authority, however, recognized a direct link between the interest income and expenses, allowing a set-off. The tribunal upheld this decision, determining the net loss under the head "income from other sources" and permitting the set-off without permission for carry forward.

In conclusion, the tribunal ruled in favor of the assessee, allowing the appeal and dismissing that of the revenue, emphasizing the commencement of business activities as the pivotal factor in determining the income category and eligibility for loss carry forward.