2024 (12) TMI 427 - AT - Income Tax

Correct head of income - interest income receipts - income from other sources OR business income - HELD THAT - Neither it does controvert nor point out any infirmity in the explanation of the assessee of having earned losses in the impugned business during the year nor is there any finding of the Department on the contention of the assessee that he had made all efforts to obtain licence as a NBFC with the RBI. The only basis we find by the Revenue for rejecting the assessee s contention is that the assessee s explanation for incurring such huge losses is not plausible and that it does not have a NBFC licence. Both these reasons, we do not find impinge in any way on the character of income earned by the assessee and we find that the reasoning that the assessee has no plausible reasons for incurring loss is incorrect. As noted above, the assessee did give an explanation for the same. As for the fact that he did not have any NBFC license, mere absence of licence does not affect the character of income earned by the assessee. The licence only makes the activity carried out by the assessee to be legal activity. In the absence of the licence, may be the activity is illegally carried out but that does not take away the fact that the assessee carried out the activity as its business. The absence of license has no effect on the character of the income. The fact that the assessee has been returning identical income as business income from year-to-year, strengthens the case of the assessee. We, therefore, for the assessee that the interest income earned by it to be treated as business income and all the claim of expenses be allowed against the same. Appeal of the assessee is allowed.

Issues Involved:

1. Treatment of interest income as "income from other sources" versus "business income."
2. Disallowance of expenses claimed by the assessee.
3. Condonation of delay in filing the appeal.
4. Deduction of expenses under Section 57 against interest income.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income:

The primary issue in the appeal was whether the interest income earned by the assessee should be classified as "business income" or "income from other sources." The assessee argued that the interest income was part of its business activities, as evidenced by its Articles of Association and Memorandum of Association, which listed financing as its main activity. Historically, the assessee had consistently declared interest income as business income, which had not been challenged by the Revenue in previous years. The Revenue authorities, however, treated the interest income as "income from other sources" primarily because the assessee was not registered as a Non-Banking Financial Company (NBFC) with the Reserve Bank of India (RBI). The Tribunal found that the absence of an NBFC license did not alter the nature of the income, which was derived from the assessee's business activities. The Tribunal agreed with the assessee's argument that the character of the income should be determined by the nature of the activities conducted, not by the presence of an NBFC license. Consequently, the Tribunal directed that the interest income be treated as business income.

2. Disallowance of Expenses:

The assessee claimed expenses totaling Rs. 1,05,20,522 against the interest income, which were disallowed by the Revenue on the grounds of being excessive and aimed at reducing tax liability. The assessee contended that these expenses were genuine and incurred wholly and exclusively for business purposes. The Tribunal noted that the assessee had provided a detailed breakdown of the expenses, including employee benefits, depreciation, and other business-related costs. The Tribunal found that the Revenue had not provided sufficient justification for disallowing these expenses, especially since similar expenses had been allowed in previous years. The Tribunal ruled in favor of the assessee, allowing the claimed expenses against the business income.

3. Condonation of Delay:

There was a delay of 26 days in filing the appeal, which the assessee attributed to not receiving the order on its registered email. The assessee filed an affidavit explaining the delay, stating that the order was discovered only when the accountant accessed the income tax portal for other purposes. The Tribunal found the explanation reasonable and condoned the delay, allowing the appeal to proceed.

4. Deduction of Expenses under Section 57:

The assessee argued that even if the interest income were to be treated as "income from other sources," the expenses should be deductible under Section 57. However, since the Tribunal decided to treat the interest income as business income, this issue became moot. Nonetheless, the Tribunal noted that the Revenue's reliance on the Supreme Court decision in Goetze India was misplaced in this context.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing that the interest income be classified as business income and that the claimed expenses be allowed. The Tribunal emphasized the importance of consistency in tax treatment and found no substantial change in facts or law to justify the Revenue's stance. The appeal was pronounced in favor of the assessee, with all grounds allowed.

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