2020 (12) TMI 661 - AT - Income Tax

Addition of business interest income u/s. 56 as against declared u/s. 28 and not allowing netting off of interest - whether CIT(A) erred in not treating the interest earned, on fixed deposit out of business funds kept as security/margin money for availing O/D facility, as business income u/s. 28 with failure to appreciate the business nexus vis-a-vis utilization of business funds and further erred in not allowing the netting-off of interest which had all the elements of mutuality towards the common business; therefore, the addition of interest u/s. 56 is uncalled for and the same may resultantly be treated as income u/s. 28 and netting-off may consequently be allowed? - HELD THAT - The assessee has duly explained that by way of pledging the F.D. s over draft for the purpose of business was obtained at the rate of interest 2% higher than F.D. rate. What more explanation is required for netting the interest expenditure is also beyond comprehension. If as per the opinion of the authorities below which itself is in fact sitting in the shoes of the businessman, the assessee should have broken the fixed deposit assessee would have been penalized for the premature realisation of interest. The fact that the rate of interest charged upon the pledge of fixed deposit is linked to the rate of interest accruing on the fixed deposit has been totally ignored by the authorities below. Moreover the fact that this interest was being treated as income from business in the earlier years has been ignored by the authorities below. It is settled law that de horse change in facts or law, the view taken in the earlier years should not be disturbed. This view was expounded by the honourable Supreme Court in the case of Radha Swami Satsang 1991 (11) TMI 2 - SUPREME COURT and reiterated in the case of Excel Industries 2013 (10) TMI 324 - SUPREME COURT . Hence, in our considered opinion the view of the authorities below to treat the said interest as income from other sources is not sustainable. Accordingly, we set aside the orders of authorities below and decide the issue in favour of assessee. Treatment of loan - A.O. added the said amount to the income of the assessee, treating the same as Income from other sources - HELD THAT - In view of the divergent stand of the assessee we deem it appropriate to remit the issue to the file of assessing officer. Assessing officer should consider the issue de novo after making appropriate enquiries. The assessing officer is also directed to consider the issue under the sanguine provisions of law which he proposes to invoke. Accordingly, this issue stands remitted to the file of assessing officer.

Summary

Issues Involved:
1. Addition of business interest income u/s. 56 and netting off of interest
2. Addition on account of alleged unexplained O/D credit balance pending adjustment
3. Levy of Penal Interests

Issue 1: Addition of business interest income u/s. 56 and netting off of interest:

The appellant contested the addition of business interest income u/s. 56, arguing that interest earned on fixed deposits from business funds kept as security for O/D facility should be treated as business income u/s. 28. The appellant emphasized the business nexus and requested netting off of interest. The appellant maintained that maintaining the fixed deposit from business funds for O/D facility was not from surplus or idle funds, but due to business exigency. The appellant argued that mere book entry is insufficient to determine income character. The assessing officer rejected the appellant's contentions, stating that the fixed deposit was from surplus funds, hence taxable as income from other sources. The tribunal found in favor of the appellant, noting that the fixed deposit was pledged for business loans and used for business purposes. The tribunal criticized the authorities for ignoring the interest rate difference between the fixed deposit and bank loan, ultimately ruling in favor of the appellant.

Issue 2: Addition on account of alleged unexplained O/D credit balance pending adjustment:

The appellant disputed the addition of an unexplained O/D credit balance, arguing that it had been accepted in previous years and should not be added in the current year. The appellant clarified that the amount received for pending electricity expenses was not subject to addition. The assessing officer deemed the amount as unexplained income, disregarding the appellant's explanations. The tribunal remitted the issue back to the assessing officer for a fresh assessment, emphasizing the need for proper inquiries and adherence to relevant tax laws.

Issue 3: Levy of Penal Interests:

The appellant denied liability for penal interest on interest received from other sources. The assessing officer observed interest received on fixed deposits but not declared as income. The appellant explained that the interest was used for business purposes, justifying it as business income. Despite the appellant's arguments, the assessing officer and CIT appeals upheld the penal interest. The tribunal found in favor of the appellant, highlighting the business purpose of the interest and the inconsistency in treating it as income from other sources. The tribunal set aside the lower authorities' orders, ruling in favor of the appellant.

In conclusion, the tribunal's judgment favored the appellant on all issues, emphasizing the business nature of the transactions and the need for proper assessment based on factual evidence and legal principles.