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2017 (5) TMI 1154 - AT - Income TaxInterest earned on loans and advances given to parties / concerns - income from the business activity of the assessee or it is case of simple diversion of fund for non-business activity - Held that - We find that there is merit in the finding of the A.O. that the loan advanced for more than three/four years to M/s. Vijay Parikh & Associates, Arpit Samani, Parikh Granito, M/s. Nisha Enterprise cannot be treated as a temporary investment of the borrowed funds. Even the loan provided to M/s. Shri Shankar Sanitation, Shubh Hotel P. Ltd. and Shub Builders P. Ltd. has crossed the limit of more than two years. Thus there is merit in the finding of the A.O. that AS-16 Borrowing Costs is not applicable in the present case. The issue of netting off of interest income against interest expenditure shall arise when the interest earned by the assessee emanate from its business activity and there is relationship between the two. The above issue shall not arise if there is diversion of fund for nonbusiness activity. These aspects have not been examined either by the A.O. or the learned CIT(A). In view of the above, we set aside the order of the learned CIT(A) and restore the matter to the file of the A.O. to examine the above and pass an order after giving reasonable opportunity of being heard to the assessee. The assessee is also directed to file the relevant details before the A.O.
Issues Involved:
1. Classification of interest income as 'income from other sources' versus 'income from business.' 2. Set-off of interest received against interest paid. 3. Addition to work-in-progress based on interest paid. Issue-wise Detailed Analysis: 1. Classification of Interest Income: The assessee contended that the interest income of ?56,23,221/- (A.Y. 2008-09) and ?64,05,656/- (A.Y. 2009-10) should be classified under the head 'income from business' as opposed to 'income from other sources.' The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, citing that the main activity of the assessee is development of residential buildings, and the interest received is not related to the business activity. The CIT(A) noted that the surplus funds were systematically advanced to sister concerns over long periods, which are akin to long-term fixed deposits, thus classifying the interest income as 'income from other sources.' 2. Set-off of Interest Received Against Interest Paid: The assessee argued that the interest received should be set off against the interest paid, with the net amount included in the work-in-progress. For A.Y. 2008-09, the assessee sought to net off ?56,23,221/- against ?86,04,016/-, and for A.Y. 2009-10, ?64,05,656/- against ?1,03,10,013/-. The A.O. rejected this, stating that the interest received is not related to the business activity, and thus, the entire interest paid should be debited to the profit & loss account. The CIT(A) upheld this view, emphasizing that the interest income from long-term advances to sister concerns should not be netted off against the interest expenditure, which should be part of the work-in-progress. 3. Addition to Work-in-Progress: For A.Y. 2009-10, the CIT(A) confirmed an addition of ?3,68,325/- calculated at 10% on the increased work-in-progress by 57.50% of the interest paid amounting to ?64,05,656/-. The CIT(A) reasoned that since the assessee follows the percentage completion method, the interest expenditure should be included in the work-in-progress along with other expenditures. Judgment and Analysis: The ITAT examined various precedents cited by both parties. The cases of CIT vs. Lok Holdings, Shree Krishna Polyster Ltd., CIT vs. Paramount Premises (P) Ltd., and Chhaganlal Khimji & Co. Pvt. Ltd. were analyzed where interest income was treated differently based on the nature and context of the business activities. The ITAT also considered the Supreme Court's ruling in M/s. The Totgar’s Co-op Sale vs. ITO, which distinguished interest income from business activities and investments. The ITAT found merit in the A.O.'s findings that loans advanced for more than three/four years to various concerns could not be treated as temporary investments of borrowed funds. The ITAT noted that the issue of netting off interest income against interest expenditure hinges on whether the interest earned emanates from the business activity of the assessee or represents a diversion of funds for non-business activities. These aspects were not adequately examined by the A.O. or the CIT(A). Conclusion: The ITAT set aside the order of the CIT(A) and remanded the matter back to the A.O. for a thorough examination of whether the interest earned by the assessee from loans and advances is part of its business activity or a diversion of funds for non-business purposes. The A.O. was directed to pass a new order after giving the assessee a reasonable opportunity to present relevant details. The appeals were allowed for statistical purposes. Order Pronouncement: The order was pronounced in the open Court on 19/05/2017.
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