2018 (2) TMI 665 - AT - Income Tax

Nature of income - Treatment to interest income - busniss income or income from other sources - Held that - we find that the assessee was engaged in the business of manufacturing of fragrance and flavours. During the year, the assessee has discontinued its business operations. The assessee has earned interest income from inter corporate deposits and treated the same as other income in its financial statements - No merit in the arguments of the assessee for the reason that all along the assessee has treated interest income under the head Income from other sources and without any change in material facts, the same has been brought under the head Income from business without any justification - the assessee itself has treated interest income as other income in its financial statements which clearly implies that the same is not from its business operations. Though the assessee claims that its activity is in accordance with its object clause in memorandum of association, on perusal of the memorandum of association we find that the assessee s main object is to manufacture fragrance and flavours. Though the assessee has financial service as an ancillary object to its main object, such activity is not the main business activity of the assessee. Therefore, there is no justification for treating interest income under the head Income from business . AO was right in treating interest income under the head Income from other sources . Disallowance of expenditure claimed against interest income - Held that - We do not find any merit in the findings of the AO for the reason that whether the assessee has income under the head business or not, expenditure incurred to maintain the corporate status of the assessee needs to be allowed. In this case, on perusal of the details of expenditure we find that the assessee has incurred office rent, auditor s remuneration and other small miscellaneous expenses which are mainly incurred to keep the corporate status of the assessee. Therefore, we are of the considered view that the AO was erred in disallowing expenditure incurred by the assessee. We direct the AO to allow expenditure claimed by the assessee u/s 37(1) of the Income-tax Act, 1961. Allowability of bad debts written off - Held that - Hon ble Supreme Court in the case of TRF Ltd vs CIT (2010 (2) TMI 211 - SUPREME COURT ) has held that once bad debt is written off in the books of account, then the assessee is not required to prove whether debt has really become bad or not; but the facts are not clear. The assessee has taken this plea by way of additional ground before the Tribunal for the first time. The AO did not have an occasion to examine the claim of the assessee in the light of provisions of section 36(1)(vii) and the decision of Hon ble Supreme Court in the case of TRF Ltd vs CIT(supra). Therefore, we are of the considered view that the issue needs to be examined by the AO.

Summary

Issues Involved:
1. Classification of interest income as 'Income from business' vs. 'Income from other sources'.
2. Allowability of expenses claimed against interest income.
3. Admission and adjudication of additional evidence regarding bad debts written off.

Issue-wise Detailed Analysis:

1. Classification of Interest Income:
The primary issue was whether the interest income earned by the assessee should be classified under 'Income from business' or 'Income from other sources'. The assessee argued that its main business activity had shifted from manufacturing fragrances and flavors to financial services, which justified treating the interest income as business income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, noting that the assessee had historically treated such income as 'Income from other sources' and had not demonstrated any material change in circumstances to warrant a reclassification. The Tribunal upheld the AO's decision, emphasizing that the assessee's primary business objective remained manufacturing, with financial services being ancillary. Thus, the interest income was rightly classified under 'Income from other sources'.

2. Allowability of Expenses Claimed Against Interest Income:
The second issue concerned the disallowance of expenses claimed by the assessee against the interest income. The AO disallowed these expenses, arguing that they were not incurred wholly and exclusively for business purposes, especially since the assessee had discontinued its primary business operations. The Tribunal, however, found merit in the assessee's claim, noting that expenses such as office rent, auditor’s remuneration, and other miscellaneous expenses were necessary to maintain the corporate status of the company, irrespective of whether business activities were conducted. Citing the decision in CIT vs. Ganga Properties Ltd, the Tribunal allowed these expenses under Section 37(1) of the Income-tax Act, 1961.

3. Admission and Adjudication of Additional Evidence Regarding Bad Debts Written Off:
The third issue involved the assessee's petition for the admission of additional evidence concerning the allowability of bad debts written off. The assessee argued that the bad debts written off in the books of account should be allowed as a deduction under Section 36(1)(vii) of the Income-tax Act, 1961, in light of the Supreme Court's decision in TRF Ltd vs. CIT. The Tribunal admitted the additional ground, noting that it emanated from the lower authorities' orders and did not introduce new facts. The Tribunal directed the AO to re-examine the issue of bad debts written off in accordance with the Supreme Court's ruling in TRF Ltd vs. CIT, which states that once bad debt is written off in the books, it is sufficient compliance with Section 36(1)(vii).

Conclusion:
The Tribunal concluded by upholding the AO's classification of interest income under 'Income from other sources' and allowing the expenses claimed by the assessee to maintain its corporate status. The issue of bad debts was remanded back to the AO for reconsideration in light of the Supreme Court's decision. The appeals were thus partly allowed.