2013 (11) TMI 217 - AT - Income Tax

Classification of head of income, whether the interest income falls under the head Business income or Income from other sources Held that - Income was earned out of surplus funds advanced by the assessee to its sister concern which was not a business activity of the assessee and neither the Ld AR could prove that advances were given for business purposes However, even if the income is treated under the head income from other sources even then the total income of the assessee would be computed after setting off losses under other sources including under the head profits from business. Addition on account of inadmissible expenses Held that - Expenses were incurred against NIL business receipts. The revenue has also not brought anything before us in support of the claim that expenses were not business expenses. The revenue s only contention is that expenses should have been capitalized as work in progress whereas in our opinion the expenses of rent, electricity, printing, telephone conveyance, security expenses, filing fee etc. Are common expenses which are required to run a business Decided against the Revenue. Change in method of accounting adopted u/s 145 of the Income Tax Act Held that - The Assessing Officer cannot force assessee to change the method of accounting specially in a case where in earlier years the method employed by assessee was accepted by Department Decided against the Revenue.

Summary

Issues Involved:

1. Classification of interest income under the head "Income from business and profession" versus "Income from other sources".
2. Disallowance of expenses claimed by the assessee.
3. Method of accounting for income recognition (percentage completion method vs. project completion method).
4. Validity of assessment orders based on materials seized during search operations.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue was whether the interest income of Rs.24,19,085/- should be taxed under "Income from business and profession" or "Income from other sources". The Assessing Officer (AO) treated it as "Income from other sources" since the interest was earned from surplus funds invested in loans to sister concerns and bank deposits. The assessee argued that the interest income was incidental to its main business of real estate development. The CIT(A) supported the assessee's view, stating that the interest income was an incidental activity to the main business and allowed the expenses related to it. However, the Tribunal disagreed, noting that the income was earned from surplus funds and not directly from business activities. Nonetheless, the Tribunal upheld that business expenses could be set off against income from other sources.

2. Disallowance of Expenses:
The AO disallowed expenses claimed by the assessee, arguing they were not related to earning interest income and should be capitalized as work in progress. The CIT(A) partially agreed, disallowing specific expenses (commission on sale of plots and business promotion) but allowed others. The Tribunal found that common business expenses (rent, electricity, etc.) were necessary for running the business and should be allowed, even if the interest income was treated as "Income from other sources".

3. Method of Accounting for Income Recognition:
For the assessment year 2008-09, the AO used the percentage completion method to estimate profits, arguing that the assessee was deferring tax liability. The CIT(A) rejected this, stating that the assessee consistently followed the project completion method, which is recognized in real estate development. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's ruling in CIT v. Manish Build Well (P) Ltd., which allows either method of accounting. The Tribunal concluded that the AO could not compel the assessee to change its accounting method, especially when it was accepted in previous years.

4. Validity of Assessment Orders:
The assessee contended that the assessment orders were invalid as they were not based on any material seized during the search operations under section 132 of the Income Tax Act. The CIT(A) rejected this contention. The Tribunal did not find it necessary to delve deeply into this issue, as the primary grounds of appeal were resolved in favor of the assessee.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue and the cross objections filed by the assessee. It upheld the CIT(A)'s decisions regarding the classification of interest income, allowance of business expenses, and the method of accounting for income recognition. The Tribunal emphasized that the AO cannot force a change in the accounting method and that legitimate business expenses are deductible even if the income is classified under a different head. The final order was pronounced in open court in September 2013.