2018 (11) TMI 793 - AT - Income Tax

Allowable business expenditure - expenses claimed by the assessee has no relevance with the interest income earned - disallowance of expenditure because the assessee has not earned any profit from its business activity - Held that - As not disputed that the fixed deposits made by the assessee was used for the purposes of obtaining SBLC. This in itself proves that the SBLC was issued by the bank for the business purpose of the assessee company. Promoting business of subsidiaries/group companies in itself is business activity. Expenses have to be incurred for the purposes of business of the assessee and not for the purposes of earning profit. The lower authorities have disallowed the expenditure because the assessee has not earned any profit from its business activity. The disallowance is on false premise. As mentioned elsewhere, the expenditure has to be incurred for the purpose of business and not for the purposes of earning profit. The expenditure has been incurred in furtherance of business activity of the appellant company and deserves to be allowed. Direct the Assessing Officer to allow expenditure. Taxing of interest earned on fixed deposits - income from other sources OR Profits and gains of business or profession - Held that - The fixed deposits were purchased by the appellant company out of share application money received from group concerns and as mentioned elsewhere, the fixed deposits were used for obtaining SBLC of 10 million Euros in furtherance of business activity of the appellant company alongwith its group companies. In my considered view, interest earned on fixed deposit has a direct nexus with the business activity of the assessee and such interest bears the requisite characteristics of business income and has nexus with the business activities of the assessee, cannot be faulted with. Interest earned on fixed deposits would form part of profits of the business of the appellant company. See case of Universal Precision Screws 2015 (10) TMI 951 - DELHI HIGH COURT . Thus direct the Assessing Officer to tax interest income under the head Profits and gains of business or profession . - Assessee appeal allowed.

Summary

Issues:
1. Disallowance of expenses under section 37 of the Income Tax Act.
2. Treatment of interest earned on fixed deposits as 'income from other sources' instead of 'income from business & profession'.

Issue 1: Disallowance of Expenses under Section 37:
The appellant company, engaged in the shipping business, declared interest income on fixed deposits but claimed various expenses including employees' benefits, finance costs, and depreciation. The Assessing Officer disallowed the expenses, stating they were not relevant to the interest income earned. The appellant argued that the expenses were incurred for business purposes, primarily to obtain Standby Letter of Credit (SBLC) for its shipping business. The Assessing Officer contended that the fixed deposits were not utilized for the appellant's business but for other group concerns abroad. The Commissioner of Income Tax (Appeals) upheld most of the disallowed expenses. However, the ITAT held that promoting business of subsidiaries is a business activity itself, and expenses must be for business purposes, not just profit. Thus, the ITAT allowed the expenses of ?21,46,309, disagreeing with the lower authorities' disallowance.

Issue 2: Treatment of Interest Income on Fixed Deposits:
The Assessing Officer taxed the interest earned on fixed deposits as 'income from other sources' instead of 'income from business & profession,' as claimed by the assessee. The appellant argued that the fixed deposits were used to obtain SBLC for business purposes, establishing a direct nexus between the interest income and business activities. The ITAT agreed, citing a Delhi High Court decision that interest earned on fixed deposits linked to business activities should be considered business income. Consequently, the ITAT directed the Assessing Officer to tax the interest income under the head 'Profits and gains of business or profession.' As a result, the appeal by the assessee was allowed.

This judgment highlights the importance of establishing a direct nexus between expenses claimed and business activities for their allowance under section 37 of the Income Tax Act. It also emphasizes that interest earned on fixed deposits linked to business activities should be treated as business income, following relevant legal precedents.