2017 (3) TMI 1246 - HC - Income Tax

Nature of interest income - income of the assessee was assessable under the head business rather than income from other sources - Held that - It is not disputed that the assessee had advanced loan to about eight parties in the 1970s, as could be gathered from the facts incorporated in the order of the Income Tax Appellate Tribunal in the appeal pertaining to the assessment year 1984-85. Since the loans were not recovered and the business of banking and money lending was being wound up, the assessee had to continue with its establishment at Nagpur and also had to incur expenses for the business establishment. The facts involved in the case before the Gujarat High Court and the present case are similar and it would be necessary to hold in the circumstances of the case that the activity of advancing money to about eight parties by the assessee was a sort of an organized activity based on the object mentioned in the Memorandum and Articles of Association of the company and the income that was derived by the assessee was liable to be taxed as income from business and not income from other sources. It would be necessary to note that the assessee had advanced a sum of ₹ 2,00,000/to Shri Ramprasad in the year 1975 on a pronote with interest of 12% per annum. Ramprasad paid the interest to the assessee only till 31.03.1978 and thereafter did not pay a single pie towards interest or principal. As nothing could be recovered from the party, the loan was ultimately written off in the year 1984 by the assessee. The assessee claimed that since no real income was earned by the assessee, nothing could be assessed in respect of the same. In the aforesaid set of facts, we find that the Income Tax Appellate Tribunal was not justified in adding accrued interest on the loan advanced to Shri Ramprasad, which was ultimately written off in the year 1984. An addition in respect of the accrued income of the nonperforming asset could not have been made. The income of the assessee was assessable under the head business and not income from other sources . Having answered the aforesaid question in favour of the assessee, we hold that in the circumstances of the case, there was no justification in law for the disallowance of 20% of the establishment expenses. We further hold that the set off of losses of earlier years could be allowed as deduction during the relevant assessment year. We also hold that in the circumstances of the case, no income from interest on the loan to Shri Ramprasad could be assessed during the relevant assessment year on accrual basis when the loan was written off in the year 1984.

Summary

Issues Involved:
1. Whether the income of the assessee was assessable under the head 'business' rather than 'other sources'.
2. Justification in law for the ad hoc disallowance of 20% of the establishment expenses.
3. Allowance of set off of losses of earlier years as a deduction during the relevant assessment year.
4. Assessment of income from interest on the loan to Shri Ramprasad during the relevant year even on accrual basis.

Detailed Analysis:

I. Assessment of Income Under 'Business' or 'Other Sources':
The primary issue was whether the income of the assessee should be assessed under 'business' or 'other sources'. The assessee, a company registered in Great Britain with a branch in Nagpur, was initially involved in the extraction and sale of manganese ore. After the Government of India took over most of its mines, the assessee amended its Memorandum and Articles of Association in 1973 to include banking and money lending. Loans were advanced to eight reputed companies between 1973 and 1975. The Reserve Bank of India permitted the assessee to continue its branch establishment only for winding up affairs and settling pending matters until 1992-93. The assessee argued that the business activities continued during the relevant assessment years, necessitating establishment expenses. The assessing officer, however, disallowed the expenses, and the Tribunal upheld the decision, categorizing the income as 'other sources'. The court, referencing similar cases and judgments, including those from the Gujarat High Court and the Supreme Court, determined that the income derived from the organized activity of advancing loans should be taxed as business income. The court held that the activity of advancing money was a sort of organized activity based on the company's Memorandum and Articles of Association, thus classifying the income as business income.

II. Justification for Ad Hoc Disallowance of 20% of Establishment Expenses:
The Commissioner of Income Tax (Appeals) had allowed the expenses of audit and legal charges in full but disallowed 20% of the remaining expenses. The court, after determining that the income was assessable under 'business', held that there was no justification in law for the ad hoc disallowance of 20% of the establishment expenses. The expenses incurred for maintaining the branch establishment were necessary for the business activity and should be fully deductible.

III. Set Off of Losses of Earlier Years:
The income tax authorities had refused to allow the set off of losses incurred in earlier years. The court, having classified the income under 'business', held that the set off of losses of earlier years could be allowed as a deduction during the relevant assessment year. This decision was influenced by the continuity of the business activity and the expenses incurred for maintaining the establishment.

IV. Assessment of Income from Interest on Loan to Shri Ramprasad:
The additional question pertained to the assessment of income from interest on a loan advanced to Shri Ramprasad, which was ultimately written off in 1984. The court found that the Income Tax Appellate Tribunal was not justified in adding accrued interest on the loan, as no real income was earned by the assessee. The addition in respect of the accrued income of the non-performing asset could not have been made, and since the income could not have been realized, the addition was liable to be deleted.

Conclusion:
The court concluded that the income of the assessee was assessable under the head 'business' and not 'other sources'. Consequently, there was no justification for the disallowance of 20% of the establishment expenses, and the set off of losses of earlier years was allowed as a deduction. Additionally, no income from interest on the loan to Shri Ramprasad could be assessed during the relevant assessment year on an accrual basis when the loan was written off in 1984. The reference applications were disposed of with no order as to costs.