2016 (5) TMI 66 - AT - Income Tax

Treatment to commission income - Profits and gains of the business or income from other sources - Held that - We have perused the memorandum and articles of the company wherein object No. 1 is stated to be that of to manage, administrate, operate, maintain into carrying on the business of hotels and related properties and further to act and work as consultant commission agent for all over in India and abroad. We are of the view that commission income of ₹ 43,700 which has been generated from real estate business is widely covered under the object clause of the memorandum of association of the company. Further, the earning of commission income is itself a separate business of the company as it is an activity of arranging and helping in negotiation of real estate. It is an organised effort of the assessee-company to generate the revenue. According to section 2(13) of the Income-tax Act business has been defined as business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture . According to us, commission income earned by the assessee is chargeable to tax under the head of Profits and gains of the business only. As business, income it specifically falls under the specific heads of income as provided under section 14 of the Income-tax Act it cannot be taxed under the residuary head of income Chargeability of interest on fixed deposit receipt as income from other sources - view of the assessee that it should be abated against capital work-in-progress - Held that - Interest income earned by the assessee is also inextricably linked with the business of the company and therefore the Assessing Officer and the Commissioner of Income-tax (Appeals) both erred in applying the ratio of decision of the honourable Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT 1997 (7) TMI 4 - SUPREME Court . Therefore, the same is required to be abated against the cost of work-in-progress of the hotel of the assessee. Therefore, we hold that the Assessing Officer and the Commissioner of Income- tax (Appeals) both yield in this case in taxing the interest income of fixed deposit receipt as income from other sources. Disallowance of claim of depreciation on earned tools used for the business - Held that - According to us, the tools and machineries, which are purchased by the assessee, are not eligible for depreciation but they themselves are cost of construction of the hotel building. Therefore, we find no infirmity in the order of the Assessing Officer and the Commissioner of Income-tax (Appeals) in not granting the depreciation on the assets

Summary

Issues Involved:
1. Validity of jurisdiction under section 153A of the Income-tax Act.
2. Classification of commission income as business income.
3. Treatment of interest on fixed deposit receipts.
4. Disallowance of depreciation on tools/machinery.

Issue-wise Detailed Analysis:

1. Validity of Jurisdiction under Section 153A of the Income-tax Act:
The assessee initially contested the jurisdiction of the Assessing Officer under section 153A of the Act. However, during the proceedings, the assessee's representative did not press this ground, leading to its dismissal.

2. Classification of Commission Income as Business Income:
The assessee earned Rs. 43,700 as commission from real estate business and declared it as business income. The Assessing Officer and the Commissioner of Income-tax (Appeals) classified it as income from other sources, arguing that the company's primary business was managing and running hotels, as per the memorandum and articles of association. The Tribunal, upon reviewing the memorandum, found that acting as a commission agent was within the company's stated objectives. The Tribunal concluded that the commission income was indeed business income, as it involved organized efforts to generate revenue. Therefore, this ground of appeal was allowed, and the commission income was classified under "Profits and gains of the business."

3. Treatment of Interest on Fixed Deposit Receipts:
The interest income on fixed deposits was contested by the assessee, who argued it should reduce the capital work-in-progress instead of being treated as income from other sources. The Tribunal examined the facts that the fixed deposits were made to furnish a performance guarantee and to temporarily park loan funds intended for the project. Citing precedents, including the Delhi High Court's judgment in Indian Oil Panipat Power Consortium Ltd. v. ITO, the Tribunal held that the interest income was inextricably linked to the business. It was decided that the interest income should reduce the cost of work-in-progress, not be taxed as income from other sources. Consequently, this ground was allowed for both assessment years 2008-09 and 2009-10.

4. Disallowance of Depreciation on Tools/Machinery:
The assessee claimed depreciation of Rs. 1,88,288 on tools and machinery used in constructing the hotel. The Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed this, stating these assets were used for construction, not the business of running a hotel. The Tribunal upheld this view, agreeing that these assets should be considered part of the construction cost rather than depreciable assets. Therefore, this ground of appeal was dismissed.

Conclusion:
The Tribunal partly allowed the appeals, recognizing the commission income as business income and directing that interest on fixed deposits should reduce the capital work-in-progress. However, it upheld the disallowance of depreciation on tools and machinery. The order was pronounced on November 6, 2015.