2013 (11) TMI 310 - AT - Income Tax

Denial of set-off of losses with income u/s 71 - intra head adjustments - Change in the name of company - AO observed from the Director s annual report that there is not merely a change in the name but a total change in line of business and denied the set-off u/s 71 Allowance of administrative expenses out of the Interest income - Held that - When there is only a change in the name of the company and all other things including the management of the company remains unchanged, then it cannot be said that the assessee has not commenced its business activities and in that event benefit under sec. 71 of the act cannot be denied to the assessee. Only because the assessee has not reported any income from business in the assessment year under dispute, it cannot automatically lead to the conclusion that it has stopped its earlier business activities. Further, on perusal of the assessment order passed for the assessment year 2009-2010, it appears that the Assessing Officer has allowed set off of administrative and other expenses against interest income while completing assessment under section 143(3) of the Act. Therefore, in the aforesaid view of the matter, the expenditure claimed cannot be disallowed and has to be set off against the interest income earned during the assessment year under dispute Decided in favor of Assessee.

Issues Involved:
1. Classification of interest income as "Income from Other Sources."
2. Allowance of administrative and other expenses against interest income.
3. Continuity of business activities and the impact on tax treatment.

Issue-wise Detailed Analysis:

1. Classification of Interest Income as "Income from Other Sources":
The primary issue in the appeal was whether the interest income of Rs.2,78,42,337/- on deposits kept in banks should be classified as "Income from Other Sources." The Assessing Officer (AO) determined that the interest income should be treated as income from other sources, citing the Supreme Court judgment in Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (227 ITR 172). The AO noted that the company had changed its business line from IT-related activities to infrastructure development and had not commenced its new business activities. Therefore, the interest earned on short-term investments made out of capital contributions was classified as income from other sources.

2. Allowance of Administrative and Other Expenses Against Interest Income:
The assessee contended that the interest income was earned on investments received for business expansion and not for setting up a factory before the commencement of business. Therefore, the administrative and other expenses of Rs.2,49,98,538/- should be allowed to be set off against the interest income. The AO, however, did not accept this contention, stating that the interest income was earned during the construction phase and before the commencement of business, thus it could not be set off against the company's losses. The AO also held that the interest income could not be reduced from the cost of construction as it had no nexus with the construction activities.

3. Continuity of Business Activities and Impact on Tax Treatment:
The AO and the CIT(A) concluded that the assessee had completely stopped its earlier business of IT and ITES services and had transitioned to a new line of business in infrastructure development. This conclusion was based on the fact that no income from the earlier business activities was reported in the impugned assessment year. The CIT(A) upheld the AO's decision, noting that the old business had ceased, and the new business had not yet commenced, thus supporting the classification of interest income as income from other sources.

The Tribunal, however, found that the change in the company's name did not equate to a cessation of the earlier business activities. It was noted that the memorandum of association of both the old and new companies had common objects, including providing IT and ITES related services. The Tribunal also observed that the management of the company remained unchanged, and the company had been filing its returns regularly. It was concluded that the assessee had not discontinued its earlier business but had not reported any income due to non-confirmation of orders from its vendors.

Conclusion:
The Tribunal directed the AO to allow the set-off of administrative and other expenses against the interest income, as the assessee had not ceased its earlier business activities but had merely undergone a change in the company's name. The appeal was allowed in favor of the assessee, and the grounds raised were accepted.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 30.8.2013.

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