1995 (2) TMI 148 - AT - Income Tax

Summary

Issues Involved:
1. Assessability of interest granted under Section 132B(4) of the Income Tax Act, 1961 on accrual or receipt basis.
2. Classification of interest income as 'business income' or 'income from other sources'.
3. Deductibility of expenses related to the interest income.

Issue-wise Detailed Analysis:

1. Assessability of Interest on Accrual or Receipt Basis:
The primary issue was whether the interest granted to the assessee under Section 132B(4) of the Income Tax Act, 1961, upon the refund of the seized amount, should be assessed on an accrual basis or receipt basis. The search party seized a sum of Rs. 4,51,700 from the assessee, which was later ordered to be refunded along with interest by the Income-tax Commissioner (ITC). The Assessing Officer (AO) assessed the entire interest amount in the assessment year 1990-91 on receipt basis, as the order for interest was passed and given in the previous year relevant to the assessment year 1990-91. However, the assessee contended that the interest should be spread over and assessed on an accrual basis across the three years 1988-89 to 1990-91.

The Tribunal analyzed the provisions of Section 132B(4)(b), which states that interest shall run from the date immediately following the expiry of six months from the date of the order under Section 132(5) to the date of regular assessment or reassessment. The Tribunal concluded that the assessee's right to interest accrues from the day after the expiry of six months from the passing of the order under Section 132(5). Therefore, the interest should be assessed on an accrual basis and not on a receipt basis, as the right to interest accrues over a period and not at a single point in time.

2. Classification of Interest Income:
The second issue was whether the interest income should be classified as 'business income' or 'income from other sources'. The AO and the Appellate Commissioner (A/C) contended that since the assessee did not carry on any business during the relevant periods, the interest income should be assessed as 'income from other sources'. The A/C supported this view by referring to Section 176(3A) of the Act and the decision of the Rajasthan High Court in CIT v. Gambhir Mal Pandya, which states that any sum received after the discontinuance of business shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt.

The Tribunal agreed with the A/C's view, stating that in the absence of specific provisions in Section 176(3A), the interest income must be assessed under the head 'income from other sources' and not as 'income from business'. The Tribunal held that the interest income could not be considered as 'business income' because the business had been discontinued long ago.

3. Deductibility of Expenses:
The third issue involved the deductibility of expenses related to the interest income. The assessee claimed certain deductions towards expenditure, such as interest on borrowed capital, bank charges, legal expenses, loss on sale of furniture, and employees' provident fund. The AO disallowed these expenses, arguing that the assessee never carried on any business during the relevant periods, and therefore, the expenses were not allowable.

The Tribunal directed that the assessee would be entitled to claim deductions in respect of expenditure incurred, which has a bearing or nexus with the interest awarded by the Income-tax Department. This direction conforms to the ratio of the decision laid down by the Rajasthan High Court in CIT v. Foresole Ltd.

Conclusion:
The Tribunal concluded that the interest received by the assessee under Section 132B(4) of the Act should be spread over and assessed on an accrual basis in the respective assessment years. The interest income should be classified as 'income from other sources' and not as 'business income'. The assessee is entitled to claim deductions for expenses that have a direct nexus with the interest income. The matter was remanded back to the AO to recompute the income for the concerned assessment years in accordance with the Tribunal's observations and directions. The assessee's appeals were partly allowed subject to these directions.