2014 (9) TMI 727 - HC - Income Tax

Set off of brought forward losses and unabsorbed depreciation against the business income disallowed Held that - Production of edible oil unit at Gajraula was temporarily suspended, because of losses and as business expediency, it was leased out - However, lease was terminated before due date and the production was reverted back, but unfortunately, because of loss it was leased out again - The temporary suspension of business does not convert the business income into income from other sources - the AO has already treated lease rent as business income - when it is so then the set off of business loss deserved to be allowed against the income arising under the head Business in respect of the two units - The income derived from leasing of commercial business assets, resulted in commercial income taxable under the head Business - Change in the mode and manner of deriving income by exploiting commercial assets either by self or by leasing the same would not change the character of income and such income would continue to be the income under the head Business income - the carry forward and set off unabsorbed business losses and depreciation are permissible against lease rental income - the order of the Tribunal is upheld Decided against revenue. Interest on borrowed capital Held that - The assessee has borrowed some funds for expansion of the existing business, on which interest was paid - both the appellate authorities have allowed the claim by observing that the interest on borrowed funds for acquiring capital asset is also an allowable deduction u/s 36(i)(iii) - the borrowed funds was utilized for expansion of the business and the interest paid is allowable - the order of the Tribunal is upheld Decided against revenue. Amount wrongly mentioned Held that - The AO has made the addition by observing that the G.P. rate was lower in comparison to the earlier years - in the earlier years, the excise duty was separately credited to excise duty payable account, whereas, during the AY under consideration, the excise duty is included in the sale price - If the element of excise duty is excluded, the G.P. rate during the year comes to 17.4% as compared to 16.69% of the last year - No defects in the books were pointed out by the AO the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
- Set off of brought forward losses and unabsorbed depreciation against business income
- Deductibility of interest on borrowed capital for capital-work-in-progress
- Deletion of trading addition made by the Assessing Officer

Set off of Brought Forward Losses and Unabsorbed Depreciation Against Business Income:
The appeals were filed against the order of the Income Tax Appellate Tribunal regarding the set off of business losses and unabsorbed depreciation against the income of another unit. The High Court noted that unity of control and common management are crucial in determining if it is the same business for set off purposes. In this case, the temporary suspension of the edible oil unit did not change the nature of business income. The lease rent was already treated as business income, allowing for the set off of business losses against it. The High Court upheld the order of the appellate authorities based on various case laws supporting this interpretation.

Deductibility of Interest on Borrowed Capital for Capital-Work-in-Progress:
The dispute regarding the deduction of interest on borrowed capital for capital-work-in-progress was addressed. The Assessing Officer disallowed the deduction, but the appellate authorities allowed it under section 36(i)(iii) of the Income Tax Act. It was found that the borrowed funds were utilized for business expansion, making the interest paid allowable as a deduction. The nature of fund utilization did not impact the deduction eligibility, especially since no new unit was started during the assessment year. The High Court sustained the decisions of the appellate authorities in allowing the deduction.

Deletion of Trading Addition Made by the Assessing Officer:
The issue of the trading addition made by the Assessing Officer was discussed. The addition was based on a lower gross profit rate compared to previous years. However, it was clarified that the inclusion of excise duty in the sale price affected the gross profit rate calculation. After excluding the excise duty element, the gross profit rate for the year was actually higher. No defects in the books were identified by the Assessing Officer. Consequently, the High Court found no reason to interfere with the orders of the appellate authorities and upheld their decisions.

In conclusion, the High Court ruled in favor of the assessee and against the Department on all three issues. The appeals filed by the Department were dismissed, and the orders of the appellate authorities were upheld. The judgment provided detailed reasoning and interpretations based on the facts and legal provisions involved in each issue.