2018 (8) TMI 1542 - AT - Income Tax

Carry forward and set off of losses in the case of certain companies - Entitled to set off of brought forward losses as against the provisions of sec. 79 - interest income should be netted off against interest expenditure and hence interest income should not be assessed separately - Held that - In the instant case, the assessee company was a closely held company at the time when the change in shareholding took place. It has become widely held company after the change in shareholding. We have held that the status of company has to be examined at the time when the change in shareholding takes place. In the instant case, the status of the company was closely held company , i. e. , a company in which public is not substantially interested, when the change in shareholding took place. The provisions of sec. 79 would apply to the company. Since there is a change in shareholding exceeding 49%, the assessee company is not entitled to set off brought forward losses relating to AY 2010-11 and earlier years. In view of the foregoing discussions, we set aside the order passed by Ld CIT(A) on this issue and restore the order passed by the AO on this issue. Interest income assessed by the AO as income from other sources - Held that - We notice that the Ld CIT(A) has examined the submissions made by the assessee that the fixed deposits have been kept with ICICI Bank in connection with the L/C facility availed by the assessee for import of DG sets for the corporate office constructed by the assessee. The assessee has furnished relevant documents before the Ld CIT(A). It is an admitted fact that the expenditure incurred in construction of corporate office has been shown as work in progress. The interest paid on loan taken for the purpose of construction of corporate officer has also been capitalized under the head Capital Work in Progress . The assessee has imported DG sets from Singapore for the use of corporate office only. The assessee has made the fixed deposits out of loan funds with ICICI Bank for availing L/C facility for importing the DG sets only. Under these set of facts, there is link between the fixed deposits and the Corporate office constructed by the assessee. Hence the decision rendered in the case of Karnal Co-operative Sugar Mills Ltd (1999 (4) TMI 7 - SUPREME COURT) and Bokaro Steels Ltd (1998 (12) TMI 4 - SUPREME COURT) shall apply to the facts of the case. Hence the assessee was justified in reducing the interest income from the above said fixed deposit from Capital work in progress. CIT(A) has rightly directed the AO to delete the addition of interest income under the head income from other sources. Accordingly we uphold the order passed by Ld CIT(A) on this issue. Appeal filed by the revenue is partly allowed.

Summary

Issues Involved:
1. Entitlement to set off brought forward losses under Section 79 of the Income Tax Act.
2. Assessment of interest income as income from other sources.

Issue-wise Detailed Analysis:

1. Entitlement to Set Off Brought Forward Losses:
The primary issue revolves around whether the assessee is entitled to set off brought forward losses from the assessment year 2010-11, despite a change in shareholding exceeding 51% during the relevant assessment year 2011-12. The Assessing Officer (AO) disallowed this set off based on Section 79 of the Income Tax Act, which restricts the carry forward and set off of losses if there is a change in shareholding exceeding 49% in a closely held company. The assessee argued that the provisions of Section 79 are not applicable as the acquiring company, M/s Edelweiss Trading and Holding Ltd, is a 100% subsidiary of a listed company, making the assessee a company in which the public are substantially interested. The AO rejected this argument, but the Commissioner of Income Tax (Appeals) [CIT(A)] accepted it and allowed the set off. Upon appeal, the Tribunal held that the status of the company at the time of the shareholding change is crucial. Since the assessee was a closely held company at the time of the change, the provisions of Section 79 applied, and thus, the set off of brought forward losses was disallowed. The Tribunal restored the AO's order on this issue.

2. Assessment of Interest Income:
The second issue pertains to whether the interest income of ?4,74,658/- received from ICICI Bank should be assessed as income from other sources. The AO assessed this interest income separately, while the assessee contended that the interest income, earned on deposits kept for availing a Letter of Credit (L/C) facility for importing equipment for constructing a corporate office, should be netted off against the interest expenditure and capitalized under Capital Work in Progress. The CIT(A) accepted the assessee's contention, referencing the Supreme Court's decisions in Karnal Cooperative Sugar Mills Ltd and Bokaro Steels Ltd, which support the treatment of such interest income as part of the capital work in progress. The Tribunal upheld the CIT(A)'s decision, agreeing that there is a direct link between the fixed deposits and the corporate office construction, justifying the reduction of interest income from the capital work in progress.

Conclusion:
The Tribunal concluded that the appeal by the revenue is partly allowed. The set off of brought forward losses under Section 79 was disallowed, restoring the AO's decision. However, the CIT(A)'s decision to delete the addition of interest income under the head income from other sources was upheld. The order was pronounced in court on 6.6.2018.