2015 (11) TMI 864 - AT - Income Tax

Treatment to interest income - business income or income from other sources - Held that - It is clear from the findings recorded by the CIT(A) that the assessee company was engaged in the business of construction as well as lending of money, both constitute its main business activity. Both these objects were clear from the Memorandum and Articles of Association of assessee company. From the record we found that the investment and lending activity was a separate stream of business apart from the business activity in real estate. As per clause 55 of Memorandum and Articles of Association, assessee was authorized to carry business of money lending. Accordingly, we do not find any infirmity in the order of CIT(A) for directing the AO to treat the interest income as business income rather than income from other sources.- Decided in favour of assessee Disallowance u/s 14A - Held that - Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the entire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case the entire income is found to be taxable, no disallowance can be made under section 14A of the Act. Moreover, the AO has not established the nexus between invested funds and the interest bearing funds. Also nterest bearing funds have not been utilized for investment for purchase of shares. - Decided in favour of assessee interest expenditure incurred for the purpose of business - whether same is deductible u/s.36(1)(iiii) or u/s.57 of the Act? - Held that - As per the findings given hereinabove the CIT(A) has correctly held that interest expenditure was incurred for the purpose of business, therefore, same is deductible u/s.36(1)(iiii) of the Act or u/s.57 of the Act. A clear finding has been recorded by CIT(A) that interest expenditure have direct nexus with the generation of income, therefore, as an alternate, the same is also allowable u/s.57 of the Act. The CIT(A) has dealt in great details AO s observation to the effect that unless interest income is earned, the interest paid cannot be allowed and held that the decision relied on by the AO in case of Tuticorin Alkali Chemicals & Fertilisers Ltd. Vs. CIT, 1997 (7) TMI 4 - SUPREME Court are not applicable to the facts of the case, insofar as assessee was already in the business of construction. The CIT(A) has also found that the assessee has already credited interest element of ₹ 10,89,78,431/- to the work-in-progress out of total interest of ₹ 11.63 crores paid on the loans taken, therefore, there is no need to further apportion interest to the work-in-progress. This finding is based on material on record, therefore, do not require our interference. As the assessee had already credited interest of ₹ 10.89 crores to work in progress out of total interest of ₹ 11.63 crores, no further interest is required to be credited to work-in-progress. Accordingly, we confirm the action of CIT(A) in this regard. - Decided in favour of assessee

Issues Involved:
1. Treatment of Interest Income
2. Disallowance under Section 14A
3. Allocation of Interest Expenditure
4. Administrative and Selling Expenses
5. Short Term Capital Gain

Issue-wise Detailed Analysis:

1. Treatment of Interest Income:
The primary issue was whether the interest income earned by the assessee should be classified as "business income" or "income from other sources." The CIT(A) determined that the assessee was engaged in the business of real estate and financing, and the interest income should be treated as business income. This conclusion was based on the assessee's Memorandum of Association, which authorized the company to engage in financing activities. The CIT(A) noted that the assessee had lent funds to group concerns and earned interest, which constituted a business activity. The Tribunal upheld this view, agreeing with the CIT(A) that the interest income was part of the assessee's business operations.

2. Disallowance under Section 14A:
The assessee contested the disallowance made under Section 14A, arguing that the entire interest payment of Rs. 1,46,49,245 should not be considered for disallowance. The CIT(A) upheld the AO's action, stating that the entire investment of Rs. 110 crores in preference shares was towards share capital, and hence, the entire interest payment should be included while calculating the disallowance under Section 14A. However, the Tribunal found that only the interest attributable to the face value of the preference shares should be disallowed, not the interest on the premium amount, as the latter generated taxable income. The Tribunal also noted that the assessee had not received any exempt income during the year, and therefore, no disallowance under Section 14A was warranted, following precedents from various High Courts.

3. Allocation of Interest Expenditure:
The AO had directed that interest expenditure be treated as direct cost and allocated to work-in-progress (WIP). The CIT(A) disagreed, stating that the interest expenditure should be allowed as business expenditure under Section 36(1)(iii) or as a deduction under Section 57(iii). The CIT(A) cited the Supreme Court's decision in Rajendra Prasad Moody, which held that interest expenditure is deductible even if no income is earned. The Tribunal upheld this view, confirming that the interest expenditure had a direct nexus with the generation of income and should not be allocated to WIP.

4. Administrative and Selling Expenses:
The AO had included administrative and selling expenses amounting to Rs. 58,55,328 in the closing stock of WIP. The CIT(A) deleted this inclusion, referencing the Institute of Chartered Accountants of India's guidance note, which states that such costs should not be included in construction costs and should be debited to the profit and loss account. The Tribunal agreed with the CIT(A), affirming that these expenses should not form part of the closing stock of WIP.

5. Short Term Capital Gain:
The AO had mistakenly added the short term capital gain of Rs. 6,25,714 twice, once under the head "capital gains" and again under "income from other sources." The CIT(A) corrected this error, directing the AO to reduce Rs. 6,25,714 from the total income. The Tribunal upheld this correction, confirming that the income had been taxed twice due to the AO's mistake.

Conclusion:
The Tribunal's judgment addressed multiple issues, ultimately favoring the assessee on most counts. The interest income was classified as business income, the disallowance under Section 14A was limited, the interest expenditure was allowed as a business expense, administrative and selling expenses were excluded from WIP, and the error in taxing the short term capital gain twice was corrected.

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