2017 (6) TMI 917 - AT - Income Tax

Taxing interest income under the head Income from other sources - Nature of income - expenses attributable to exempt income or income from House Property and not to interest income - Held that - The fact that a person carried on business does not lead to the inference that all income received by such a person is business income. The same assessee can have income which may require to be classified under more than one head. It is the manner in which the income is derived that is relevant and not merely the fact that the person is engaged in a business or in a profession. Interest received by a company which carries on business, from bank deposits and loans could only be taxable as business income . (ii) Interest paid on overdraft obtained for the purpose of business cannot be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to taxed under the head income from other sources . (iii) However, though the assessee may not be entitled to have interest paid by it on the overdraft to the bank, deducted from the interest received by it on the short term fixed deposits, the assessee is entitled to deduction of the same from its business income. Facts being similar, we follow the ratio laid down in the case of South Indian Shipping Corporation Ltd. 1998 (2) TMI 43 - MADRAS High Court and hold that the AO has rightly brought to tax interest income under the head Income from other sources . However, the AO is directed to allow the claim of expenses of ₹ 15,56,592/- from the business income of the assessee, after verification.

Summary

Issues:
1. Disallowance of expenses against interest income under section 57 of the Income Tax Act, 1961.
2. Classification of interest income as "income from other sources" and its taxability.
3. Allowance of expenses against interest income from fixed deposits.

Analysis:
1. The appellant challenged the disallowance of expenses amounting to ?15,56,592 against interest income in the assessment year 2010-11. The Assessing Officer disallowed the expenses, stating that as the income was passive, no expenses were allowed under section 57 of the Act. The appellant contended that the expenses were attributable to interest income and should be allowed against it. The Commissioner (Appeals) upheld the disallowance, relying on a judgment regarding the classification of interest income.

2. The Commissioner (Appeals) classified the interest income as "income from other sources" based on the judgment of the Madras High Court in a similar case. The High Court held that income derived from bank deposits and loans should be taxed as business income. However, interest paid on overdrafts for business purposes cannot be deducted from interest earned on fixed deposits, as the latter falls under "income from other sources." The Tribunal followed this judgment and directed the Assessing Officer to allow the expenses against the business income of the assessee.

3. The Tribunal allowed the appeal in part, directing the Assessing Officer to verify and allow the claim of expenses against the business income after hearing the assessee. The judgment emphasized following the precedent set by the Madras High Court regarding the classification of income and the treatment of expenses against different sources of income.

This comprehensive analysis highlights the key issues raised in the judgment, the legal reasoning behind the decisions, and the final outcome of the appeal.