2019 (2) TMI 1595 - HC - Income Tax

Interest income determination - Correct head of income - business income OR income from other sources - also disallowance of claim of interest expenditure - HELD THAT - Interest income earned has to be termed as business income in the present facts. This as its activity of lending money was a separate activity of business besides construction We find both the CIT(A) and the Tribunal on examination of records found that the respondent was engaged in construction activities as well as in the activity of lending money. The mere fact that the respondent did not earn any income on its investment made, the interest expenditure would not cease to be an expenditure incurred for business. The concurrent finding of fact by the CIT (A) and the Tribunal cannot be found fault with. Accordingly, the question as proposed does not give rise to any substantial question of law. Thus, the two questions are not entertained. Disallowance u/s 14A r.w.r.8D - HELD THAT - Where no exempt income is earned in the subject assessment year, occasion to disallow any expenditure under Section 14A could not arise. - Decided against revenue

Summary

Issues:
1. Classification of interest income as business income or income from other sources.
2. Allowability of interest expenditure as business expenditure.
3. Applicability of Section 14A for disallowance of expenses related to exempt income.

Issue 1:
The first issue involves the classification of interest income as business income or income from other sources. The appellant challenged the order of the Income Tax Appellate Tribunal (Tribunal) regarding the treatment of interest income earned by the respondent company. The Assessing Officer considered the interest income as income from other sources and disallowed the claim of interest expenditure as business expenditure. However, the Commissioner of Income Tax [Appeals] (CIT(A)) and the Tribunal both found that the interest earned should be taxed as business income, and the interest expended should be allowed as a business expenditure. The Tribunal noted that even if no interest income was earned, the interest paid had to be allowed as a revenue expenditure since it was incurred to carry on the business. The Tribunal concluded that the interest income earned had to be termed as business income, as the respondent was engaged in both construction activities and lending money, treating them as separate business activities. The High Court upheld the Tribunal's decision, stating that the interest expenditure for business purposes remains valid even if no income is earned on investments made.

Issue 2:
The second issue pertains to the allowability of interest expenditure as business expenditure. The respondent had claimed interest expense amounting to a specific sum for investments and construction activities, which the Assessing Officer disallowed. The CIT(A) confirmed the disallowance, but the Tribunal overturned this decision. The Tribunal held that the interest expense was to be allowed as a business expenditure, as it was incurred for carrying on the business activities of the respondent. The High Court agreed with the Tribunal's findings, emphasizing that the interest expenditure for business purposes remains valid, even if no income is earned on the investments made by the respondent.

Issue 3:
The third issue involves the applicability of Section 14A for disallowance of expenses related to exempt income. The respondent had worked out a suo motu disallowance under Section 14A, but the Assessing Officer disallowed a higher sum based on Section 14A read with Rule 8D of the Income Tax Rules. The CIT(A) upheld this disallowance, but the Tribunal ruled in favor of the respondent, stating that no disallowance was warranted under Section 14A as the assessee did not receive any exempt income during the relevant assessment year. The Tribunal relied on various court decisions to support its conclusion. The High Court examined the Apex Court's decision in Maxopp Investment Ltd and other relevant cases, concluding that where no exempt income is earned in the assessment year, there is no basis to disallow any expenditure under Section 14A. Therefore, the High Court upheld the Tribunal's decision, dismissing the Income Tax Appeal.

In summary, the High Court upheld the Tribunal's decision on all issues, affirming that the interest income should be classified as business income, interest expenditure is allowable as business expenditure, and Section 14A does not apply when no exempt income is earned during the assessment year. The appeal under Section 260A of the Income Tax Act, 1961 was dismissed.