2018 (1) TMI 667 - AT - Income Tax

Nature of income - busniss income or income from other sources - Held that - It is not denied by the learned DR, even though he has vehemently relied on the order of the authorities below that main business of the assessee is shipping business and the assessee has also taken loan from SCICI Ltd. for the purchase of ship and charting in vessels. The assessee since could not immediately acquire the ship, has advanced the money from its own sources as well as from the money borrowed to its subsidiary company, which were also engaged in the similar business. Since these companies to whom the assessee has given temporary loan for acquiring ship is also the subsidiary company of the assessee therefore even on the basis of commercial expediency, the assessee is bound to assist those companies. We, therefore, set aside the order of the CIT(A) on this issue and direct the AO to treat the sum of ₹ 3,41,10,001/- out of the sum of ₹ 3,64,92,593/- as income from business. The rest of the income i.e. interest on staff loan, interest on securities, miscellaneous earning, rent received as well as income tax refund to the extent sustained by us, cannot be regarded as income from business. We, therefore, do not find any illegality or infirmity in the order of the CIT(A) to the extent that these income as assessed under the head Income from other sources. Addition respect of interest and other expenses attributable to the tax free income - Held that - It is not a case where the AO has applied the provisions of section 14A but just allocated the various expenses between the exempt income as well as taxable income. It is not denied that the assessee is having own funds to the extent of ₹ 39,74,69,549/- while investment on tax free securities was to the extent of ₹ 16,01,31,377/- as is apparent from page 87 of the paperbook (balance sheet). We noted that the disallowance has simply being made by the AO on estimate basis. In view of the decision of Hon ble Jurisdictional High Court in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT we are of the view that no such disallowance can be made as the natural inference will be that the assessee made investment in tax free securities out of its own funds. We, therefore, delete the said disallowance. Thus, additional ground stands allowed. Claim of deduction towards the expenses as well as treating the interest received from subsidiary company and inter corporate loans, bill discounting to be part of profit of shipping business - Held that - Since while disposing of additional ground no.1, we have directed the AO to treat the interest received from subsidiary as well as interest and discounting charges on trade bills as Income from business of the assessee as part of shipping business, the natural inference will be that the interest paid as well as other expenses which has been disallowed to the extent of ₹ 2,23,17,217/- will automatically be allowed as deduction out of the income computed from business. Thus, to that extent ground 1 and 2 are allowed. Loans of barge division - Held that - AR was fair enough to concede that this issue is duly covered against the assessee by the decision of this Tribunal in the case of DCIT vs. Orion Agencies Ltd. 2009 (6) TMI 680 - ITAT MUMBAI . We accordingly, dismiss this ground.

Summary

Issues Involved:
1. Interest paid and received by the appellant company.
2. Deduction of gross interest paid from the profit of the shipping business.
3. Loss in the barge division.
4. Deduction of interest paid on loans under section 57(iii).
5. Effect of the appeal order of the CIT(A).
6. Additional ground regarding interest on income tax refund.
7. Classification of various incomes as "income from other sources" or "business income".
8. Allocation of interest expense to exempt incomes.

Detailed Analysis:

1. Interest Paid and Received by the Appellant Company:
The appellant company argued that the interest paid to SCICI Ltd. for loans taken for ship acquisition and other purposes should be netted off against the interest received from subsidiary companies and inter-corporate loans. The appellant contended that the interest received should be reduced by the interest paid, based on the principle of netting off.

2. Deduction of Gross Interest Paid from the Profit of the Shipping Business:
The appellant challenged the decision of the Assessing Officer (AO) and the CIT(A) that the gross amount of interest paid on loans borrowed should be deducted from the profit of the shipping business to determine the shipping profits for deduction under section 33AC. The appellant argued that the interest received from subsidiary companies and inter-corporate loans should be considered part of the business income and not as income from other sources.

3. Loss in the Barge Division:
The appellant contended that the loss incurred in the barge division, amounting to ?28,64,444, should not be deducted from the profit of the shipping business for computing the deduction under section 33AC. The appellant argued that the loss from barges, which were leased out, should not be considered as part of the shipping business.

4. Deduction of Interest Paid on Loans under Section 57(iii):
The appellant argued that if the interest received is considered as income from other sources, then the interest paid on loans should be deducted under section 57(iii) based on the principle of netting off.

5. Effect of the Appeal Order of the CIT(A):
The appellant requested that the AO give effect to the appeal order of the CIT(A) dated 8.3.2013.

6. Additional Ground Regarding Interest on Income Tax Refund:
The appellant raised an additional ground that the interest received on income tax refund under section 244A, amounting to ?20,11,502, should not be taxable in the year under appeal as it was subsequently withdrawn due to reassessment under sections 143(3) and 147. The Tribunal admitted this additional ground and reduced the addition to ?7,55,931.

7. Classification of Various Incomes as "Income from Other Sources" or "Business Income":
The appellant challenged the classification of various incomes aggregating ?3,64,92,593 as income from other sources by the AO. The Tribunal held that the interest received from subsidiary companies and inter-corporate deposits, as well as discounting charges on trade bills, should be treated as business income. However, other incomes such as interest on staff loans, interest on securities, miscellaneous earnings, rent received, and income tax refund were to be treated as income from other sources.

8. Allocation of Interest Expense to Exempt Incomes:
The AO allocated ?1,20,73,623 of interest expense to the earning of exempt incomes, such as dividend and interest on tax-free securities. The Tribunal noted that the appellant had sufficient own funds to cover the investments in tax-free securities and held that no disallowance should be made based on the decision of the Hon'ble Jurisdictional High Court in the case of HDFC Bank Ltd. 366 ITR 505.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to treat certain interest incomes as business income and allowed the deduction of related expenses. The Tribunal also deleted the disallowance of interest expense allocated to exempt incomes and directed the AO to give effect to the CIT(A)'s order. The loss in the barge division was not allowed to be deducted from the shipping business profit, and the additional ground regarding interest on income tax refund was partly allowed.