2015 (2) TMI 355 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - whether there is no finding by the AO that the assessee has incurred interest expenditure relatable to earning of exempt income? - Held that - There is no charge to the profit and loss account on account of interest. The investments in equity shares were made in the earlier year and not during the current year. There is no fresh investment during the year. The AO by invoking the provisions of Rule 8D has disallowed interest expenditure of ₹ 59,485/- under Rule 8D(2)(ii). As already stated the assessee has not claimed any expenditure under the head interest expenditure. When the AO could not demonstrate that the assessee has incurred interest expenditure for earning income which does not form part of total income, the question of applying Rule 8D(2)(ii) does not arise. Thus the disallowance has to be necessarily deleted. . As regards disallowance computed under Rule 8D (2)(iii) on account of administrative charges, the Ld. CIT(A) has upheld the computation made by the AO. The argument of the assessee that the AO has not recorded his satisfaction while invoking rule 8D is not correct, thus the disallowance to the extent of ₹ 72,000/- is upheld. - Decided partly in favour of assessee. Assessment of interest income - income from other sources or Business Income - Held that - The interest is not earned out of surplus money. The assessee had an obligation to repay its debentures holders etc. and was acting under the directions of the Hon ble Delhi High Court and Hon ble Mumbai High Court in the process of fulfilling its financial obligations certain interest is earned. On this factual matrix in our view the interest is assessable only under the head income from business but not under the head income from other sources . The assessee is a NBFC and money in its stock in trade. Interest income received from fixed deposits, is business income. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income-tax Act, 1961
2. Assessment of interest income under different heads - "Income from Other Sources" or "Profits and Gains of Business or Profession"
3. Treatment of income from house property as against income from "Other Sources"
4. Computation of income and correctness of the calculations

Issue 1 - Disallowance under Section 14A:
The appellant challenged the disallowance made under Section 14A, arguing that no interest expenditure was incurred for earning exempt income. The appellant contended that as no fresh investments were made during the year, the disallowance was unjustified. The Tribunal held that in the absence of evidence of interest expenditure related to exempt income, the disallowance under Rule 8D(2)(ii) was not warranted. Citing the Maxopp Investments Ltd. case, the Tribunal ruled in favor of the appellant, deleting the disallowance.

Issue 2 - Assessment of Interest Income:
The question arose whether interest income should be assessed under "Income from Other Sources" or "Profits and Gains of Business or Profession." The appellant, a non-banking financial company, argued that the interest earned on fixed deposits was business income due to financial constraints and court directions. The Tribunal agreed, holding that the interest, earned under court directions to fulfill financial obligations, was assessable as business income, not under other sources.

Issue 3 - Treatment of Income from House Property:
The Revenue appealed the treatment of income as from house property instead of other sources. The Tribunal dismissed this ground, upholding the first appellate authority's correction of assessing rental income under "Income from Other Sources" without proper justification by the Assessing Officer.

Issue 4 - Computation of Income:
Regarding the computation of income, discrepancies were found in the figures used by the Assessing Officer. The Tribunal directed a fresh calculation by the AO for accurate computation, setting aside the issue for further assessment. The Tribunal allowed this ground for statistical purposes, ensuring correct computation of income.

In conclusion, the Tribunal allowed the appeals of the assessee in part, upheld the treatment of interest income as business income, dismissed the revenue's appeal on income classification, and directed a fresh computation of income for accuracy. The judgment provided detailed analysis and legal references to support the decisions made by the Tribunal.