2022 (6) TMI 966 - AT - Income Tax

Correct head of income - interest income received by the assessee from its short term fixed deposit as income under the head income from other sources OR income from business - HELD THAT - The funds that have been deposited by the assessee are not extra funds but these are part of the loans, therefore, the netting is a right principle to be applied against the interest income. The arguments of ld AR that the amount in Flexi account are not deposited by the assessee but the amount transferred to the bank also hold water. Admittedly, when the money transferred to flexi account from current account generate certain interest income. This interest income is also liable to be set off against the interest outgoing. We are not adjudicating as to whether this interest income is to be assessed under the head income from business or income from other sources as these interest income have gone to reduce the interest burden on the assessee s loans taken and the set off is to be granted to the assessee against interest outgo. In these circumstances, the disallowance as made by the AO and confirmed by the ld CIT(A) on this issue stands deleted. AO is directed to give the benefit of set off of the interest income against the interest expenditure. Our view finds support from the decision of Hon ble Supreme Court in the case of National Co-operative Development Corporation 2020 (9) TMI 496 - SUPREME COURT wherein held that income has to be determined on the principles of commercial accountancy. In the case of a business, the profits must be arrived at on ordinary commercial principles. The scheme of the I.T.Act requires the determination of real income on the basis of ordinary commercial principles of accountancy. To determine the real income , permissible expenses are required to be set off . Disallowance made by the AO under the head prior period expenses - HELD THAT - Admittedly, as per the provisions of section 32 of the I.T.Act, 1961, whether the assessee claimed the depreciation or not, the depreciation is compulsory to be allowed to the assessee. It is also an admitted fact that the assessee has been formed on account of demerger from GRIDCO. The depreciation breakup of the earlier years relate to the depreciation allowable to the assessee in respect of demerger of GRIDCO. These figures would not have been available to the AO for granting the depreciation u/s 32 of the Act, especially when this has come to his notice only during the relevant assessment year. Similarly, it is admitted that certain expenses have been incurred during the earlier years but that does not mean that the assessee loses the benefit of such expenses. Admittedly, the stand of the AO that prior period expenses relate to earlier years cannot be considered during the relevant assessment year is a valid stand. This being so, the issue in respect of prior period expenses is restored to the file of the AO with a direction that said expenses are to be considered and allowed for such of the earlier years in respect of which the said expenses relate to. Hence, this issue stands partly allowed.

Summary

Issues Involved:
1. Classification of interest income from short-term fixed deposits.
2. Disallowance of prior period expenses.

Issue 1: Classification of Interest Income from Short-Term Fixed Deposits

The primary contention was whether the interest income from short-term fixed deposits should be classified as "income from business" or "income from other sources." The assessee argued that the deposits were short-term, ranging from 10 to 91 days, and were made to manage excess funds in a "Flexi Account" where the bank automatically transferred surplus funds to fixed deposits. The assessee claimed this interest as "business income" since it was closely linked to the business operations and used to offset business expenses, specifically interest on loans.

The Revenue, however, treated this interest income as "income from other sources." The CIT(A) partially agreed with the assessee, treating some interest types as business income but classified interest from fixed deposits, SLDC Development Fund, and Flexi Account as "income from other sources."

The Tribunal considered the short-term nature of the deposits and the necessity for the assessee to manage its financial obligations efficiently. It emphasized that the deposits were not surplus funds but part of the business's working capital. Consequently, the Tribunal ruled in favor of netting the interest income against the interest expenditure, drawing support from the Supreme Court's decision in National Cooperative Development Corporation vs. CIT, which emphasized determining real income based on commercial principles. Thus, the Tribunal directed the AO to allow the set-off of interest income against interest expenditure.

Issue 2: Disallowance of Prior Period Expenses

The assessee argued that it incurred certain expenses in previous years but received the intimation later, leading to their claim in the current year. These included depreciation due to demerger from GRIDCO, pay arrears, house rent, leave salary, and bonus arrears. The assessee suggested that if these expenses couldn't be allowed in the current year, they should be considered for the respective earlier years.

The Revenue contended that these expenses were known to the assessee in earlier years and should have been claimed then. The CIT(A) upheld the AO's disallowance of these expenses in the current year.

The Tribunal acknowledged that, per Section 32 of the Income Tax Act, depreciation is mandatory whether claimed or not. Given the demerger from GRIDCO, the depreciation figures for earlier years might not have been available to the AO. Therefore, the Tribunal restored the issue to the AO, directing them to allow these expenses in the respective earlier years they relate to, thus partly allowing the assessee's appeal on this issue.

Conclusion

The appeals were partly allowed for statistical purposes, with the Tribunal directing the AO to set off the interest income against interest expenditure and to consider prior period expenses in the respective years they pertain to. The judgment was pronounced in the open court on 13/6/2022.