2019 (3) TMI 684 - AT - Income Tax

Interest income - Correct head of income - income from other sources OR income from business - AO treated the lending of money as an independent and unrelated activity and consequently the interest on said lending was treated as income from other sources - HELD THAT - We find that it is not a case of interest income earned by the assessee which is incidental to the business activity of the assessee but the assessee has given the loans in the market for earning the interest and therefore, the interest was earned by the assessee on intentional activity of lending. It is not a simple case of parking the money in the bank but the assessee has deliberately given the advances in the market for earning the interest. Hence, we concur with the view of the AO on the point that the interest earned by the assessee from giving loan by the assessee in the market is income from other sources and not the business income. Set off of business loss against the interest income as per the provisions of Section 71 - HELD THAT - Since the assessee already commenced the business in the F.Y. 2005-06 and has now incurred expenditure on account of advertisement, exhibition, consultancy charges which are an allowable business expenditure, then the said business expenditure will be business loss for the year under consideration for want of any business income and consequently the interest income assessed as income from other sources would be set off against the business loss as per the provisions of Section 71. Therefore, we find merits in the alternative contention of the ld AR that the business loss can be set off against the interest income. We direct the Assessing Officer to allow the interest income to be set off against the business loss in the shape of the expenditure subject to the verification of the fact that the said expenditure has not been added to the cost of the project in the subsequent year. Appeal of the assessee is partly allowed.

Summary

Issues:
1. Treatment of interest income as income from other sources and computation of business loss.
2. Allowability of setting off interest income against business loss.

Detailed Analysis:

Issue 1: The primary issue in this case revolves around the treatment of interest income earned by the assessee. The Assessing Officer assessed the interest income as income from other sources instead of business income, as the lending activity was considered independent of the business activity. The assessee contended that the interest income should be treated as business income, as it arose from surplus funds related to the business. The Assessing Officer acknowledged that the assessee had commenced business activities in the previous financial year. However, it was determined that the interest earned was from intentional lending activities, not incidental to the core business. Consequently, the interest income was classified as income from other sources. The Tribunal agreed with this view, emphasizing that the interest was earned deliberately through lending activities, not merely idle funds parked in a bank.

Issue 2: The second issue pertains to the allowability of setting off the interest income against the business loss incurred by the assessee. The assessee argued that even if the interest income was categorized as income from other sources, it should be set off against the business loss to avoid double taxation. The Tribunal found merit in this contention, citing Section 71 of the Act, which allows for setting off losses against income. As the assessee had incurred legitimate business expenditures amounting to a business loss, the interest income could be offset against this loss. Therefore, the Tribunal directed the Assessing Officer to permit the interest income to be set off against the business loss, subject to verification that the expenditure had not been included in the project cost in subsequent years.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the assessee on the issue of setting off the interest income against the business loss. The judgment highlighted the distinction between deliberate lending activities generating interest income and incidental funds parked in a bank. The decision underscored the importance of correctly categorizing income sources and the applicability of set-off provisions to prevent double taxation.