2017 (5) TMI 716 - AT - Income Tax

Set off of unabsorbed depreciation pertaining to A.Y. 2000-2001 and A.Y 2001-02 from income under the head income from other sources - Held that - It is the amended section 32(2) of the Act that shall apply in relation to unabsorbed depreciation pertaining to A.Y. 2000-01 and A.Y 2001-02 and the restriction of 8 years which was in force till the law was amended by the Finance Act 2001 does not apply. In the instant case, it is not in dispute that the unabsorbed depreciation pertaining to A.Ys 2000-01 and 2001-02 have not been set off in the earlier years and the same is being carried forward to the year under consideration for being set off. In light of above, ground taken by the Revenue is dismissed. Maintainability of appeal - Held that - It cannot be said that issue relating to set off of unabsorbed depreciation doesnt arise from the assessment order. At the same time, as far as governing law relating to set off for the year under consideration is concerned, the same is allowed as we have held above that it is the amended section 32(2) as amended by the Finance Act 2001 that will apply. In the result, ground no. 2 of assesses s cross objection is partly allowed. Interest income earned - Income from Business OR Income from other sources - Held that - What is relevant to examine is whether advancing of funds by way of interest bearing loan is one of the activities which has been regularly carried by the assessee as part of its business activities or not. And where such activities are not part of the regular business activities carried on by the assessee, what is the business expediency of advancing funds to the third parties. The next question that arise for consideration is the funds that have been advanced and whether the same have been advanced from borrowed funds as claimed by the appellant or internal surplus funds as available with the assessee and how the necessary nexus is established between the two. The ld AR has submitted that these advances were made in earlier years as is evidenced from copy of accounts submitted herewith along with Bank statement showing source of advance being from C.C A/c of Bank and thus they are not short term advances but are long term advances. There is no such finding of fact by the lower authorities in this regard. In our view, these are the matters which required further examination and we deem it fit to set aside the matter to the file of the AO to examine the same afresh.

Summary

Issues Involved:

1. Classification of interest income as 'Income from Business' versus 'Income from Other Sources'.
2. Set-off of unabsorbed depreciation from previous years against current income.
3. Nexus between interest paid and interest earned for set-off purposes.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The assessee contended that the interest income of ?51,15,618/- for AY 2008-09 and ?49,75,203/- for AY 2009-10 should be classified under 'Income from Business' rather than 'Income from Other Sources'. The CIT(A) and the Assessing Officer (AO) classified this income under 'Income from Other Sources'. The assessee argued that the interest was earned from advances made out of business funds to reduce the burden of interest payable to the bank, and hence, should be considered as business income. The CIT(A) noted that the assessee failed to establish a business nexus with the parties to whom the advances were made and that the advances were not from surplus funds. The Tribunal set aside this matter to the AO for fresh examination, directing to verify whether advancing funds was a regular business activity and the source of these funds.

2. Set-off of Unabsorbed Depreciation:
The Revenue challenged the CIT(A)'s decision to allow the set-off of unabsorbed depreciation from AY 2000-01 and AY 2001-02 against 'Income from Other Sources' for AY 2009-10. The AO relied on the Special Bench decision in DCIT vs. Times Guaranty Ltd., which limited the carry forward of unabsorbed depreciation to eight years. However, the Tribunal referred to the Gujarat High Court's decision in General Motors India Pvt. Ltd., which clarified that the amended section 32(2) by the Finance Act 2001 allows unabsorbed depreciation from AY 1997-98 to AY 2001-02 to be carried forward indefinitely and set off against any income. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

3. Nexus Between Interest Paid and Interest Earned:
The assessee argued for the set-off of interest paid against interest earned, claiming that the advances were made from business funds (CC limit of the bank) and not surplus funds. The CIT(A) disallowed this set-off, stating that the assessee failed to establish a nexus between the interest paid and the interest earned. The Tribunal directed the AO to re-examine the nexus, considering whether the funds advanced were indeed from borrowed funds and whether advancing funds was a regular business activity.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection and appeal for statistical purposes, directing further examination by the AO on the classification of interest income and the nexus between interest paid and earned. The Tribunal upheld the CIT(A)'s decision on the set-off of unabsorbed depreciation, following the Gujarat High Court's interpretation of section 32(2) as amended by the Finance Act 2001.