2015 (6) TMI 756 - AT - Income Tax

Dis-allowance of Interest expenses - Disallowance on ground that RBI not recognised the assessee as NBFC - Disallowance of Carry-forward loss and depreciation - Held that - Permission/denial by the RBI to register an assessee as NBFC does not decide the issue of carrying of business or make the business illegal. If the assessee had violated any provisions of law under the RBI Act it would be penalised by the appropriate authority. But that does not mean that the systematic organized activity carried out by the assessee for earning profit would not be treated as business. The explanation to sec.37(1) of the Act is not at all applicable to the case under consideration. Also The rule of consistency demands that for deviating from the stand taken in the earlier AY., the AO should bring on record the distinguishing feature of that particular year. We find that the AO or the FAA has not mentioned even a single line as to how the facts of the case under appeal were different from the facts of the earlier or subsequent years. We find that the disallowance of the expenses was without any basis. - Claim of interest allowed - Decided in favor of assessee. Disallowance of Carry-forward loss and depreciation - Issue squarely covered by Judgment delivered in Lavish Apartment Pvt. Ltd. 2012 (7) TMI 666 - DELHI HIGH COURT in which it was held that income against which brought forward loss is claimed to be set off should represent business income judged by application of commercial principles and not on application of provisions of Act. - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of expenses by CIT(A)
2. Setoff of brought forward unabsorbed business loss and depreciation
3. Admission of additional grounds of appeal

Detailed Analysis:
1. Disallowance of expenses by CIT(A):
The assessee, a corporate entity engaged in leasing, financing, and trading, filed its income tax return showing a loss. The Assessing Officer (AO) disallowed certain expenses, including interest on loans, legal and professional charges, auditor's remuneration, general expenses, and directors' sitting fees. The AO treated interest income as income from other sources due to the rejection of the assessee's application to function as a Non-Banking Financial Company (NBFC) by the Reserve Bank of India (RBI). The First Appellate Authority (FAA) upheld the AO's decision, stating that the assessee was not carrying out any business activity and disallowed the interest expenditure. However, the Appellate Tribunal held that the denial of registration as an NBFC did not make the business illegal, and the expenses incurred by the assessee should be allowed as they were related to the business activity. The Tribunal reversed the decision of the FAA and allowed the expenses, holding that interest income should be taxed as business income.

2. Setoff of brought forward unabsorbed business loss and depreciation:
The assessee had claimed setoff of brought forward losses and depreciation against the assessed income. The FAA disallowed the setoff, stating that the assessee was not carrying on any business activity and that no business expenditure could be allowed. However, the Tribunal referred to a High Court judgment and held that the income against which brought forward loss is claimed to be set off should represent business income judged by commercial principles. Therefore, the Tribunal decided in favor of the assessee, allowing the setoff of brought forward business loss and depreciation against the income.

3. Admission of additional grounds of appeal:
The assessee sought to admit additional grounds of appeal related to the allowability of expenses under a different section of the Income Tax Act. The Tribunal found that the additional grounds raised were about an alternative claim for the allowability of expenses and admitted them. However, as the original grounds of appeal were decided in favor of the assessee, the additional grounds became infructuous and were not adjudicated upon. Ultimately, the appeal filed by the assessee was allowed by the Tribunal.

In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, allowing the expenses disallowed by the CIT(A) and permitting the setoff of brought forward business loss and depreciation. The Tribunal emphasized the importance of considering commercial principles in determining business income and expenses, overturning the decisions of the lower authorities.