2014 (7) TMI 211 - AT - Income Tax

Income on account of interest treated as income from other sources Disallowance of remuneration to partners from interest income - Held that - Both the interest paid and earned arising from a common pool of funds - where there are earmarked funds, yielding interest income, even though it is open in such a case to be argued that such funds form part of the business funds, dedicated to meet some defined business purpose, while the interest income is only incidental - the interest income, which acquires its character from the surrounding circumstances - Relying upon CIT vs. Govinda Choudhury & Sons 1992 (4) TMI 8 - SUPREME Court - income from other sources is hardly tenable on the basis of the facts on record - it is even not possible to say conclusively if any interest income has at all been earned, except perhaps for the interest realized at rate/s in excess of that at which the moneys are borrowed Decided in favour of Assessee.

Summary

Issues:
Assessment of interest income as business income or income from other sources; Deductibility of interest expenditure as business expenditure; Impact of interest income on remuneration allowable to partners.

Analysis:
The case involved an appeal by the Assessee against the Order of the Commissioner of Income Tax (Appeals) regarding the assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2008-09. The Assessee, a firm dealing in foodgrains and spices, had interest income of Rs. 13,04,850, which was treated as indirect income. The Assessing Officer excluded this income, leading to a dispute as the Assessee claimed it to be a business decision to reduce interest costs. The Commissioner partly allowed the appeal, considering only the interest on bank FDRs as business income. The remaining interest income from outside parties was held assessable as income from other sources. This resulted in a restriction on the remuneration to partners. The Assessee appealed this decision.

The Tribunal analyzed the arguments presented by both parties. The Authorized Representative's argument regarding the impact of interest income on the quantum of remuneration allowable to partners was rejected. The Tribunal emphasized that an expenditure deductible under section 37(1) must be against business income and cannot be computed with reference to income assessable under a different section. The Tribunal found that the Assessee had interest income of Rs. 13.05 lakhs but had also incurred interest expenditure of Rs. 40.37 lakhs, which was not disputed as a business expenditure under section 36(1)(iii). The Tribunal questioned whether the Assessee had actually earned any income on account of interest considering the common pool of funds from which both interest paid and earned arose. The Tribunal highlighted the need to demonstrate that interest income arises from earmarked funds dedicated to a defined business purpose.

The Tribunal concluded that the Revenue's stance was untenable. It was observed that the interest income in question did not conclusively show that any income had been earned, except for interest realized at rates higher than the borrowing rates. Therefore, the Tribunal allowed the Assessee's appeal, indicating that the remuneration to individual partners would be revised accordingly based on the decision. The judgment was pronounced in favor of the Assessee on June 13, 2014.