2019 (3) TMI 1606 - AT - Income Tax

Correct head of taxability of interest income - business income or income from other sources - HELD THAT - From the copy of the certificate issued by the Bank of India, Angul Branch, the assessee firm had availed overdraft facility from the bank which was sanctioned in the financial year 2011-2012 against the pledged of fixed deposit by the assessee firm and overdraft amount was used by the assessee firm for the purpose of business and interest was also paid thereon. In this situation, earning of impugned interest on fixed deposit is inextricably linked with the business activity of the assessee and the impugned interest income has to be treated as business income of the assessee and the same cannot be put under the head income from other sources‟ in spite of fact that the assessee has shown this interest income in the profit and loss account and has not shown any amount as income from other sources. Accordingly, ground of the assessee is allowed and the AO is directed to treat the interest income on fixed deposit as business income - Decided in favour of assessee. Best judgment assessment u/s 144 - treated the status of the assessee firm as AOP on the ground of non-compliance of notices - denying deduction of salary and interest to partners u/s.184(5) - double tax as the partners have offered the interest and salary income in their return - HELD THAT - Lucknow Tribunal in the case of Surendra Prasad Misra 2005 (9) TMI 267 - ITAT LUCKNOW-A held that mere non-cooperation of the assessee making it difficult to determine the correct income may justify an assessment u/s.144 but that by itself is not sufficient to assess the firm as an AOP u/s.184(5). Disallowance u/s.184(5) does not have a cause and effective relevancy with the assessment framed u/s.144 and this provision can be invoked only as a result of assessee‟s committing any failure as mentioned u/s.144. Considering the totality of circumstances of the present case and the allegation leveled by the AO in the assessment order against the assessee, I am of the considered view that the AO has merely erred in taking provisions of Section 184(5) without any justified and reasonable basis and without bringing any specific allegation of non-compliance against the assessee. There was some non-compliance on the part of the assessee but while invoking provisions of Section 145(3) and proceeding to frame assessment u/s.144, the AO has not alleged any other notice except notice dated 03.11.2014 and notice dated 23.01.2015. As regarding notice dated 03.11.2014, there is no mention of any non-compliance in the remarks column as mentioned in the assessment order by the AO and in respect of notice dated 23.01.2015 the AO himself noted that the assessee produced bank statement, list of sundry debtors and the assessee did not file reply of questionnaire and documents called for but the AO has not alleged that the assessee did not produce books of accounts as required by the said notice. In these circumstances, invoking provisions of Section 184(5) cannot be held as justified - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of interest income as business income or income from other sources.
2. Invocation of Section 144 and denial of deductions under Section 184(5) due to non-compliance with notices.

Detailed Analysis:

Ground No. 3: Classification of Interest Income

Arguments and Submissions:
- The assessee's representative (AR) argued that the interest income of ?10,61,806/- disclosed in the profit and loss account should be treated as business income. The interest was earned on fixed deposits made to avail an overdraft facility for business purposes.
- The AR contended that the fixed deposits were pledged for the overdraft facility, and the overdraft amount was used for business activities. Hence, the interest earned is inextricably linked with the business activity.
- The AR pointed out that the Commissioner of Income Tax (Appeals) [CIT(A)] incorrectly noted that the assessee had offered the interest income as non-business income in the return of income for A.Y. 2012-2013.
- The Department Representative (DR) supported the CIT(A)'s order, arguing that the assessee had shown the interest income as business income and should not change its stand.

Tribunal's Findings:
- The Tribunal found that the assessee had not shown any income from other sources in the Income Tax Return for A.Y. 2012-2013.
- The Tribunal was satisfied that the overdraft facility was sanctioned against the fixed deposits, and the overdraft amount was used for business purposes.
- Consequently, the interest earned on the fixed deposits was deemed to be inextricably linked with the business activity.
- The Tribunal directed the Assessing Officer (AO) to treat the interest income of ?10,61,806/- as business income, thereby allowing ground No. 3 of the appeal.

Ground No. 4: Invocation of Section 144 and Denial of Deductions

Arguments and Submissions:
- The AR argued against the CIT(A)'s decision to confirm the AO's action of invoking Section 144 and treating the firm as an Association of Persons (AOP) due to non-compliance with notices under Sections 142(1) and 143(2).
- The AR highlighted that there was partial compliance with the notices, and the non-compliance was not complete. The AR also pointed out that the partners had shown salary and interest income in their returns and paid taxes, thus preventing double taxation.
- The AR relied on the ITAT Lucknow Bench decision in Surendra Prasad Misra Vs. ITO, asserting that mere non-cooperation does not justify assessing the firm as an AOP under Section 184(5).

Tribunal's Findings:
- The Tribunal noted that the AO's rejection of the books of accounts was based on partial non-compliance with notices and not complete non-compliance.
- The Tribunal observed that the AO had not alleged non-production of books of accounts but only non-compliance with some notices.
- The Tribunal referred to Section 184(5), which allows the AO to deny deductions if there is a failure as mentioned in Section 144. However, the Tribunal found that the AO's allegations did not justify invoking Section 184(5).
- The Tribunal concluded that partial non-compliance does not warrant denial of deductions for interest and salary paid to partners.
- The Tribunal directed the AO to allow the interest and salary paid to the partners, thereby allowing ground No. 4 of the appeal.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to treat the interest income as business income and to allow the deductions for interest and salary paid to partners. The decision emphasized the importance of linking interest income to business activities and clarified the conditions under which Section 144 and Section 184(5) can be invoked.