2015 (6) TMI 564 - AT - Income Tax

Assessment of the interest income - under the head Profit & gains of business or profession OR Income from other sources - Held that - There is no evidence of any organized activity or embarking on housing finance business in any manner. The loan, given to a director, prior to the stated decision of change in the business, is not shown to be for the purchase or acquisition of any house property. Further, rather than the same being recalled, it continues to outstand year after year, with even the interest thereon being not received or recovered. The interest income, under the circumstances, which are admitted and borne out by the record, would necessarily fall to be classified for assessment purposes under the residuary head of income, i.e., as income from other sources, or u/s. 56 of the Act. Allowability of the various expenses claimed by the assessee in terms of section 57 - Held that - The said expenditure is general expenditure incurred for various functions/activities, ostensibly for maintaining the establishment of the assessee s undertaking. The same would thus not fall to be covered within the compass of section 57(iii), given its limited scope, i.e., for earning income, and which is only the interest income on a single loan granted by the assessee to, one, Shri Maneklal Bhandari. In fact, the expenditure allowed, i.e., on filing fees, bank charges and audit fee, would, again, strictly speaking, not fall within the purview of section 57(iii), and stands allowed on being the minimum statutory expenses required to be incurred in view of the legal requirement incident on the assessee as a company. The decision by the AO, since endorsed by the ld. CIT(A), cannot, therefore, be faulted with. - Decided against assessee. Addition being notional interest on advances paid to M/s B.U. Bhandari treating the same as a loan - Held that - When the principal amount itself is not forthcoming, there is great uncertainty in collecting interest, which has not been provided for. The same can, under the circumstances, be either agreed to between the parties, or directed by a third party, as an arbitrator, for example, to whom the parties may approach, or a court of law. We are conscious, when we state so, that we presume a normal, genuine problem on hand, while the Revenue s case is based on the transaction, as being reflected, in the absence of any evidence, as not true, raising serious and valid doubts with regard to its genuineness. True, but that would not by itself imply of the assessee-company to have benefited, at the cost of the payee, to any extent. Tax, it is trite law, can only be charged on real income, while we find no basis for inferring the interest cost on the part of Revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of the order passed under section 143(3) r.w.s. 263 of the Income Tax Act.
2. Classification of interest income as "Income from Other Sources" versus "Profits & Gains of Business or Profession."
3. Disallowance of various business expenses.
4. Addition of notional interest on advances treated as loans.

Detailed Analysis:

1. Legality of the Order Passed Under Section 143(3) r.w.s. 263:
Ground No.1 was not pressed during the hearing. The Tribunal found this ground to be not maintainable as it challenges the legality of the impugned order, which is separate from the section 263 order. Both orders are appealable before the Tribunal, thus making the ground invalid or not maintainable in law.

2. Classification of Interest Income:
The second ground pertained to the classification of interest income under the head "Income from Other Sources" instead of "Profits & Gains of Business or Profession." The CIT(A) upheld the assessment of interest income under "Income from Other Sources" as directed by the CIT in the section 263 order. The Tribunal agreed with CIT(A) that the AO was bound by the specific direction under section 263 and had no discretion to classify the income differently. The Tribunal further elaborated that the assessee, incorporated in 1994 for property development, never commenced its business due to a lull in the real estate market and instead engaged in housing finance. However, the only activity was a loan to a director, with no organized housing finance business evident. The interest income, therefore, was rightly classified as "Income from Other Sources" under section 56 of the Act. The Tribunal cited relevant case laws to support this classification.

3. Disallowance of Business Expenses:
The third issue involved the disallowance of various business expenses claimed by the assessee. The AO allowed only statutory minimum charges, disallowing other expenses as the assessee was not carrying on any business. The CIT(A) upheld this decision, noting that the expenses did not have a direct nexus to earning interest income and thus were not allowable under section 57(iii). The Tribunal agreed, emphasizing that the disallowed expenses were general in nature and not incurred for earning the interest income. The Tribunal found no fault in the AO's decision, which was endorsed by CIT(A).

4. Addition of Notional Interest on Advances:
The fourth issue involved the addition of notional interest on advances paid to M/s B.U. Bhandari, treated as a loan. The AO treated the advance for booking two shops as a loan due to the prolonged delay in possession and lack of substantiation. The CIT(A) confirmed this addition. The Tribunal agreed with the Revenue's inference of the transaction as a loan, given the lack of evidence and the significant delay. However, the Tribunal did not support the imputation of interest cost, noting the uncertainty in collecting interest when the principal amount itself was not forthcoming. The Tribunal allowed this ground in favor of the assessee, stating that tax can only be charged on real income.

Appeal for AY 2004-05:
The issues raised for AY 2004-05 were identical to those for AY 2002-03, involving the classification of interest income and allowance of expenditure. The Tribunal applied its findings from AY 2002-03 to AY 2004-05, dismissing the appeal for AY 2004-05.

Conclusion:
The assessee's appeal for AY 2002-03 was partly allowed, and the appeal for AY 2004-05 was dismissed. The Tribunal emphasized that its decisions were based on definite findings of fact, and the legal issues raised by the assessee were found inapplicable to the case's facts and circumstances.