2014 (12) TMI 511 - AT - Income Tax

Interest and lease charges written off disallowed income assessed as income from other sources - Held that - In order to determine the head of income under which the income generated out of a particular activity is assessable, one has to look into the intention of an assessee at the time when he started that activity - If the intention is to carry on that activity as a sustained business activity, then the income arising there from is assessable under the head Income from Business - the assessee has been declaring the interest income and lease rental income under the head Other sources only in the earlier years - the assessee has not advanced funds or leased out machineries to any other concerns or parties - there was no intention with the assessee to carry on business of either giving loans on interest or in leasing out its machinery - the assessee has changed its stand only during the year under consideration and further it did not bring any material on record to show that the assessee intended to carry on the activity of advancing money or leasing out plant as a sustained business activity. The assessee has declared both the interest income and lease rental income under the head Other sources would show that the intention of the assessee was only to carry those activities as an investment activity only - the treatment given by the subsidiary company cannot decide about the taxability in the hands of the assessee - The assessee also has taken a stand that the business proximity of the assessee with its subsidiary and the vested interest in the welfare of the subsidiary are the factors that will go to decide the nature of interest and lease rental income - the intention of the assessee at the inception of the activity would decide the nature of the activity and not the close business connection or the welfare of the recipient. The contention of the assessee is accepted that the interest income and lease rental income should have been assessed under the head Income from business the AO was justified in assessing both the income under the head Income from other sources , as declared by the assessee - the view of the AO is accepted that the amount written off by the assessee cannot be considered as expenditure incurred wholly and exclusively for the purpose of earning of income, which is included in the computation of income under the head Income from other sources the order of the CIT(A) is set aside Decided in favour of revenue.

Issues Involved:
1. Deletion of disallowance of Rs. 61.14 lakhs relating to the claim of "Interest and lease charges written off."
2. Classification of income under the correct head for tax purposes.
3. Allowability of deductions under Section 57(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Rs. 61.14 Lakhs:
The revenue challenged the decision of the CIT(A) in deleting the disallowance of Rs. 61.14 lakhs claimed by the assessee as "Interest and lease charges written off." The assessee supported the CIT(A)'s order, arguing that the amounts written off were previously offered as income by its subsidiary, M/s Malankara Woods Ltd., and hence should be allowed as a deduction.

2. Classification of Income Under the Correct Head:
The assessee declared interest income and lease rental income under the head "Income from Other Sources" in earlier years. However, it argued that these should have been classified under "Income from Business" due to the intimate business connection with its subsidiary. The CIT(A) accepted this argument, stating that the transactions between the holding and subsidiary companies were verifiable and logical, and allowed the claim based on the fact that the income had been previously offered to tax.

3. Allowability of Deductions Under Section 57(iii):
The AO disallowed the claim, stating that the written-off amounts did not qualify as expenditure incurred wholly and exclusively for earning income under "Income from Other Sources" as per Section 57(iii) of the Act. The CIT(A) disagreed, emphasizing the business connection and the fact that the income was previously taxed.

Tribunal's Analysis and Decision:
The Tribunal examined the rival contentions and relevant records. It noted that the assessee had consistently declared the interest and lease rental income under "Other Sources" in earlier years. The Tribunal emphasized that the intention at the inception of the activity determines the head under which income is assessable. Since the assessee had not shown any intention to carry on the business of financing or leasing as a continuous activity, the income should remain classified under "Other Sources."

The Tribunal disagreed with the CIT(A)'s reliance on the subsidiary's treatment of the waived amounts, stating that taxability in the hands of the assessee cannot be influenced by the subsidiary's actions. The Tribunal also rejected the argument that business proximity with the subsidiary should affect the income classification.

Final Judgment:
The Tribunal concluded that the AO was justified in assessing the income under "Other Sources" and disallowing the claim, as the written-off amounts were not incurred wholly and exclusively for earning income under that head. Therefore, the Tribunal set aside the CIT(A)'s order, restored the AO's disallowance, allowed the revenue's appeal, and dismissed the assessee's cross-objection.

Conclusion:
The Tribunal upheld the AO's decision to disallow the deduction of Rs. 61.14 lakhs, maintaining the classification of income under "Other Sources" and reinforcing the criteria for allowable deductions under Section 57(iii) of the Income Tax Act.

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