2023 (2) TMI 250 - AT - Income Tax

Correct head of income - Treatment of compensation received for breach of specific performance of the agreement - Business income or Income from other sources - HELD THAT - Assessee did not lose any source of income or any profit / income deriving source but it was clearly a loan facility. The findings rendered with respect to re-stated agreement dated 15.02.2007 remain uncontroverted before us. All these facts would lead us to inevitable conclusion that the stated arrangement was nothing but loan facility extended by the assessee to the borrower. In return of loan facility, the assessee was to receive nothing but interest only. Therefore, the amount so received by the assessee has rightly been considered as interest income by Ld. AO and the adjudication as done by Ld. CIT(A), in the impugned order, to that extent, could not be faulted with. At the same time, it could be seen that the assessee is engaged in the business of making strategic investments in real estate space and having objective to invest in large projects both in commercial and residential space. The loans have been granted in furtherance of business objectives and therefore, interest income has to be considered as the Business Income of the assessee and not as Income from other sources . Therefore, AO is directed to compute the interest income earned by the assessee as Business Income and as a consequence, allow business expenditure, as allowable against the same. Applying the same reasoning, the interest earned by the assessee on inter-corporate deposits advanced to M/s Indus City Scapes Construction Pvt. Ltd. would be assessed as Business Income . We order so. The appeal stands partly allowed. Allowability of factoring charges - AO held that factoring charges was nothing but interest and therefore, the deduction of which would not be allowed to the assessee in terms of Sec.40(a)(ia), inter-alia, for want of deduction of tax at source - HELD THAT - From the facts, it emerges that the assessee has availed factoring facility from EAFSL against receivables and paid factoring charges. We find that factoring charges could not be termed as interest u/s 2(28A) as per the decision of Hon ble High Court of Delhi in PCIT vs. M. Sons Gems N Jewellery (P) Ltd. 2016 (4) TMI 1132 - DELHI HIGH COURT This decision has referred to the decisions of Hon ble Kolkata High Court in CIT v. MKJ Enterprises Ltd. 2014 (12) TMI 682 - CALCUTTA HIGH COURT as well as another decision of Cargill Global Trading (P.) Ltd 2011 (2) TMI 209 - DELHI HIGH COURT Considering these binding decisions and in the absence of any contrary decision on record, we would hold that no such disallowance could have been made u/s 40(a)(ia). Since we have already directed that the interest income earned by the assessee would be assessable as business income and there is complete nexus of factoring charges with the funds advanced by the assessee and therefore, the factoring charges, would be an allowable deduction to the assessee. We order so. This Ground stands allowed.

Summary

Issues Involved:

1. Treatment of compensation as interest income.
2. Head of income under which interest earned by the assessee would be assessable.
3. Treatment of factoring charges.

Detailed Analysis:

1. Treatment of Compensation as Interest Income:

The assessee entered into a facility agreement with Sahara India Commercial Corporation Limited (SICCL) to acquire rights in land, advancing Rs. 400 Crores. Due to SICCL's failure to convert the land for commercial use, the assessee received Rs. 35 Crores as compensation, which was claimed as a capital receipt. The Assessing Officer (AO) scrutinized the agreement and concluded it was a loan facility agreement. The terms indicated an annual return of Rs. 135 Crores for the loan, and non-payment allowed the lender to sell securities. The AO determined the arrangement was a disguised loan facility, treating the Rs. 35 Crores as interest income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, confirming the addition. The Tribunal agreed, concluding the compensation was interest income, not a capital receipt.

2. Head of Income Under Which Interest Earned by the Assessee Would Be Assessable:

The assessee argued that interest earned from inter-corporate deposits should be treated as business income. The AO treated it as income from other sources, denying business expenditure claims. The Tribunal noted the assessee's business involved strategic investments in real estate, and the loans were part of business objectives. Thus, the interest income should be considered business income, allowing related business expenses. This applied to interest earned from both SICCL and Indus Cityscapes Constructions Pvt. Ltd.

3. Treatment of Factoring Charges:

In AY 2010-11, the assessee claimed Rs. 782.68 Lacs as factoring charges for loans taken from Easy Access Financial Services Ltd. (EAFSL), pledging receivables from Vantage Reality Pvt. Ltd. (VRPL). The AO disallowed the deduction under Sec. 40(a)(ia) for non-deduction of tax at source, treating it as interest. The Tribunal referred to the Delhi High Court's decision in PCIT vs. M. Sons Gems N Jewellery (P) Ltd., which held factoring charges are not interest under Sec. 2(28A). Consequently, the Tribunal allowed the factoring charges as a deductible business expense.

Conclusion:

The appeals were partly allowed, with the Tribunal directing the AO to treat interest income as business income and allow related business expenses. Factoring charges were also allowed as a deductible expense. The compensation received was rightly treated as interest income. The decisions applied mutatis mutandis to the subsequent assessment years, confirming the consistent treatment of similar issues.