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2020 (2) TMI 116 - AT - Income TaxCharacterization of income - treatment to interest receipt - business receipt or income from other sources - HELD THAT - As decided in own case funds obtained by the assessee for its infrastructure project has been temporarily parked to reduce interest burden thereon and accounted for in accordance with Accounting Standard 16 of ICAI The principle that the interest earned out of term deposits made out of the business funds available with the assessee before they are utilized for actual business, is incidental to business activity of the assessee and accordingly, should be considered as business income and not income from other sources. Disallowance u/s 14A - HELD THAT - Disallowance under section 14 A is to be restricted to the exempt income earned. This view is supported by various decisions referred in the appellate order referred above. Hence this ground is also dismissed. MAT - Disallowance under section 14 A cannot be imported for adjusting the book profit under section 115 JB
Issues Involved:
1. Treatment of interest receipt as business receipt vs. revenue receipt. 2. Disallowance of interest expenses under Section 57 of the IT Act, 1961. 3. Treatment of interest expenses as Work-in-Progress (WIP). 4. Disallowance under Section 14A in the absence of exempt income. 5. Adjustment to Book Profit under Section 115JB due to expenses related to exempt income. Detailed Analysis: 1. Treatment of Interest Receipt as Business Receipt vs. Revenue Receipt: The primary issue revolves around whether the interest income of ?59,11,170 should be classified as a business receipt or as revenue receipt taxable under "income from other sources." The CIT(A) treated the interest receipt as business income, aligning with the assessee's argument that the interest earned on ICDs and bank deposits was intricately linked with its business activities. The Assessing Officer (AO) had treated this income as revenue receipt, citing the Supreme Court decision in Tuticorin Alkali Chemical & Fertilizers Ltd. V/s CIT. However, the Tribunal upheld the CIT(A)'s decision, noting that the interest income was indeed part of the business operations of the assessee. 2. Disallowance of Interest Expenses under Section 57: The AO disallowed the interest expenses claimed by the assessee, arguing that there was no business activity or project during the year. The CIT(A) overturned this, reasoning that since the interest income was treated as business income, the corresponding interest expenditure should also be treated as business expenditure. The Tribunal upheld this view, emphasizing consistency with the treatment of interest income and referring to the principle of judicial consistency from the case of Janak S. Kangwala vs. ACIT. 3. Treatment of Interest Expenses as Work-in-Progress (WIP): The AO disallowed the entire project development expenses shown in WIP, arguing that no business activity or project was undertaken by the assessee. The CIT(A) reversed this, stating that the interest expenses were related to strategic investments in group companies, which were in line with the business objectives of the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the facts of the case were consistent with previous years where similar expenses were allowed. 4. Disallowance under Section 14A in the Absence of Exempt Income: The AO invoked Rule 8D to disallow expenses attributable to long-term investments, even though no exempt income was earned during the year. The CIT(A) ruled in favor of the assessee, following the precedent that disallowance under Section 14A is not applicable when no exempt income is received. The Tribunal upheld this decision, citing various judicial pronouncements that supported the view that disallowance under Section 14A should be restricted to the extent of exempt income earned. 5. Adjustment to Book Profit under Section 115JB: The AO made adjustments to the book profit under Section 115JB on account of expenses related to exempt income. The CIT(A) deleted this adjustment, supported by the Special Bench decision in the case of Vereet Investments, which held that disallowance under Section 14A cannot be imported for adjusting the book profit under Section 115JB. The Tribunal upheld the CIT(A)'s decision, reiterating that the provisions of Section 14A r.w.r. 8D are not applicable for the computation of book profit under Section 115JB. Conclusion: The Tribunal dismissed the Revenue's appeals for the assessment years 2012-13, 2013-14, and 2014-15, upholding the CIT(A)'s orders on all issues. The decisions were consistent with the treatment of similar issues in previous years, emphasizing judicial consistency and the specific facts of the case. The Tribunal's judgment provides clarity on the treatment of interest income, disallowance of expenses, and the applicability of Section 14A and Section 115JB in the context of business operations.
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