2011 (2) TMI 1573 - HC - Income Tax

Summary

Issues involved:
1. Determination of whether interest received from bank deposits is income from business or other sources.
2. Proportionate disallowance of interest paid on funds borrowed for investments in immovable properties and shares.

Issue 1 - Interest from bank deposits:
The High Court considered the appeal arising from the Income Tax Appellate Tribunal's orders regarding the nature of interest received from bank deposits. The assessee, a non-banking financial company, argued that the deposits were maintained as per RBI directions for security purposes. However, the High Court noted that the assessee did not present this argument before the lower authorities. The Court highlighted the need for a detailed consideration by the CIT(Appeals) regarding the requirement to maintain bank deposits as per RBI directions. It emphasized the importance of assessing whether the assessee's business activities align with the nature of investments made, such as in shares and real estate, to determine if the interest from bank deposits should be treated as business income or income from other sources.

Issue 2 - Disallowance of interest on diverted funds:
The High Court also addressed the disallowance of interest on funds diverted for investments in shares and immovable properties. It questioned whether the assessee earned income from trading shares or real estate transactions. The Court highlighted that if the assessee engaged in long-term investments, the interest on diverted funds should not be allowed as a deduction but considered in the computation of capital gains. Additionally, the Court noted that interest on borrowed funds diverted for acquiring shares, even if yielding dividends, would not be eligible for deduction under Section 14A of the Act. The Court found that the CIT(Appeals) and the Tribunal had not properly considered this issue and referred to relevant case law to support its decision.

Conclusion:
The High Court allowed the appeal, setting aside the orders of the Tribunal and the first appellate authority. The matter was remanded to the CIT(Appeals) for a comprehensive reconsideration of both issues after providing an opportunity to the assessee and engaging in discussions with the Assessing Officer.