DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 8(1), MUMBAI, MUMBAI vs. NOVASYNTHETIC PRIVATE LIMITED, MUMBAI

PER SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER: This appeal is filed by the Revenue against the order of the learned Commissioner of Income Tax (Appeals)-47, Mumbai, dated 19.12.2025, for the assessment year 2012-13.

1) Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in holding that the interest income earned by the assessee is assessable under the head “Profits and Gains of Business OR Profession” without appreciating that the assessee was not engaged in any systematic OR organized business activity of money-lending OR financing during the relevant year 2) Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that the assessee had itself disclosed in the Notes to Accounts that it had not raised funds from any source except interest- free loans from members and that NBFC registration was still under process, thereby indicating absence of any organized financing business 3) Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that the interest income arose from business activity, despite the assessee having advanced loans only to a single entity out of interest-free funds received from its director, without any frequency, continuity, OR regularity in lending operations 4) The Appellant craves leave to add, alter, amend, OR withdraw any of the above grounds of appeal at OR before the time of hearing of the appeal.”

“10.1 During the course of appellate proceedings, the AR of the appellant has submitted as under: "Grounds of Appeal nos. 3 & 4 Return of income was filed on 28-09-2012 declaring income of Rs. 6,18,03,831/-, which was fully set off against unabsorbed business loss for earlier years. 5 The Learned Income tax officer, 7 (2) (4) completed assessment u/s 143(3) on 25- 03- 2015. Income was assessed at Rs. 6,17,81,960/-, as the learned AO denied set off of unabsorbed losses holding that interest income of Rs.6,17,81,959/-, derived by the assessee is 'income from other sources & not as business income'. A demand of Rs. 103,71,560/-, has been raised. The limited issue is whether interest income of Rs. 6,17,81,959/- earned by the assessee is assessable under the head 'profits and gains of business' as claimed by the assessee or under the head 'Other Sources' as has been done by the learned AO. The learned AO rejected the contention of the assessee that it is involved in the business of advancing loans / lending money as, according to him, this activity is not carried on in a systematic or organized manner. The learned AO ultimately held that interest earned by the assessee on loan given is assessable as 'Income from other sources' & not as 'business income'. As a result the learned AO refused to set off business loss of earlier years against current income & determined income at Rs. 6,17,81,960/-. At the outset it may be stated that the learned AO has overlooked the fact that in A.Y. 2010-11, in an order passed u/s 143(3) (copy annexed) it has been accepted that the assessee is engaged in finance business. For AY 2011-12 also this position continues in as much as the return was accepted u/s 143(1). Without anything further, it is respectfully submitted that, since there is no change in the facts the department cannot adopt a different stance in this assessment year. This view is taken by the Hon'ble Delhi high court in the case of CIT vs. Om Prakash Khaitan (2016) 138 DTR (Delhi) 197. Identical view was taken in CIT vs. Dalmia Promoters Developers Pvt Ltd. (2006) 281 ITR 346 (Delhi). In this case, interest income on deposits was treated as business income in earlier years. The court held that in the absence of any change of facts, the Department could not take a different view. The court referred to & followed the decision of the Hon'ble Supreme Court in the case of Radhaswami Satsang vs. CIT 193 ITR 321 for this purpose. Had that view been followed the taxable income would have been NIL as per return of income filed by the assessee company. Applying the rule of consistency it is respectfully submitted that the AO should be directed to assess interest income as business income. Without prejudice to the above it may be pointed out that the assessee is engaged in the business of trading in shares & securities and also lending money. This is evident from Memorandum of Association of the Company objects clause (B) Objects Incidental or Ancilliary to the attainment of the main objects which clearly permits the company to make loans, give Guarantees & provide securities to any other company or other persons and to carry on the business as financiers ---"

Although it is true that the assessee has over the years been lending monies from time to time to only one party that cannot be determinative of the nature of the transaction. It may be noted that in the audited accounts of the assessee the monies so advanced have been classified as 'Long term loans'. It is respectfully submitted that there is a well-established difference between a loan and a deposit. Whereas a deposit is usually made at the instance of the depositor a loan is generally given at the instance of the borrower. This itself makes it clear that whereas placing a deposit could be a case of merely deploying surplus funds, a loan has an element of business as a decision is taken to lend the money which amount to, if nothing else, at least an adventure on the part of the lender. Lending exclusively to a Group entitity is also not determinative of the issue. The assessee finds it safe to lend only within the Group. Further it is not a case that a sum of money has been lent once and for all and thereafter there is no activity. In this case there has been lending on various occasions. The rate of interest charged is 10 to 12% which is also comparable to market rate of lending taking into account all surrounding circumstances. We are enclosing herewith a copy of ledger account of M/s Robust Marketing Services Pvt Ltd. for the period 01-04-2007 to 31-03-2012. First Loan entry is on 18- 09-2008 and thereafter, loans have been given from time to time thereby indicating an intention to carry on 'Money lending business'. It is incorrect to say that merely because loan is given to only one party, It is not a 'business'. We give below position of funds available (own & borrowed) with our client & utilization of funds as on 31-03-2011 & 31-03-2012. Funds Available As on 31-03-2011 (Rs in Lacs) As on 31-03-2012 (Rs in Lacs) Share Capital 128.25 128.25 Reserves & Surplus 8121.45 9490.39 Loan from director 5443.04 7221.87 13692.74 16840.51 Utilisation of Funds Non- Current Investments 1599.09 1841.36 Long Term Loans & advances 5904.67 8952.29 7 Inventories (Shares & Units) 6328.69 6308.70 13832.44 17102.35 It is clear that part of the borrowed funds have been utilized for giving loans another indication that the activity is carried on as a 'business'. It is also worth noting that the position has remained the same in both the financial years. We rely on the decision of the Bombay High Court in the case of Paramount Premises (P) Limited (190 ITR 259) when interest on temporary loans was held to be assessable under the head 'profits and gains of business'. Reliance is also placed on the decision of the Bombay High Court in the case of Indo Swiss Jewels Limited (284 ITR 389) wherein it was held that interest on short term deposits was in the nature of business income. Similar view was taken by the Bombay High court in the case of LOK Holdings (308 ITR 356) In the present case it is not as if lending constitutes any incidental activity; lending itself is a business activity carried on by the assessee. In view of the above facts & submissions, the learned AO may please be directed to assess interest income of Rs. 6,17,81,959/- under the head 'profits and gains of business' as was done in the earlier year and to allow set off of unabsorbed business loss against current income." Decision on Ground nos. 3 & 4: 10.2 The Ground Nos. 3 and 4 of the present appeal are interconnected and arise out of the same set of facts. These grounds relate to the action of the Assessing Officer in assessing the interest income earned by the appellant under the head "Income from Other Sources" instead of "Profits and Gains of Business or Profession" and the consequential denial of set-off of business losses / allowance of business expenditure. Since both the grounds emanate from the same issue, they are taken up together for adjudication. 10.2.1 During the course of assessment proceedings, the Assessing Officer observed that the appellant had earned interest income during the year under consideration. According to the Assessing Officer, such interest income did not have a direct nexus with the core business activity of the appellant and, therefore, the same was assessed under the head "Income from Other Sources". Consequent to such classification, the Assessing Officer denied the benefit of set-off of business losses and other consequential adjustments available when income is assessed under the head "Business Income".

10.2.2 The appellant, in its submissions as reproduced above, has contended that the interest income was earned out of funds which were intrinsically linked with the business operations of the appellant. It has been submitted that the appellant is engaged in regular business activities and the interest income arose from temporary deployment or utilisation of surplus business funds, which were not permanently diverted for any non-business purpose. It has further been submitted that such interest income is incidental to and inseparable from the business of the appellant and therefore retains the character of business income. 10.2.3 I have carefully considered the assessment order, the reasoning adopted by the Assessing Officer and the submissions of the appellant as placed on record. On perusal of the facts, it is evident that the appellant is carrying on business activities and the interest income has been earned in the course of carrying on such business. The Assessing Officer has not brought on record any cogent material to demonstrate that the interest income was earned from an independent or separate source which was totally unconnected with the business of the appellant. INCON 10.2.4 It is also noticed that the funds on which interest inc income was earned were part of the common pool of business funds and were utilised in a manner dictated by business exigencies. Mere earning of interest on such funds, by itself, does not alter the nature of the income, so long as the source of such funds and their utilisation are connected with business operations. The classification of income must be determined having regard to the real character of the income and the surrounding facts, and not merely on the basis of nomenclature. 10.2.5 In the present case, the Assessing Officer has proceeded primarily on the assumption that interest income cannot automatically be treated as business income. However, such an approach overlooks the factual position emerging from the records, namely that the interest income has arisen from deployment of business funds and is incidental to the carrying on of business. In absence of any finding that the funds were diverted for non-business purposes or invested in an independent income-generating source, the action of the Assessing Officer cannot be sustained. 10.2.6 Once it is held that the interest income is assessable under the head "Profits and Gains of Business or Profession", the consequential treatment adopted by the Assessing Officer under Ground No. 4 automatically becomes unsustainable. The denial of set-off of business losses and allowance of business expenditure was solely on account of the interest income being assessed under the head "Income from Other Sources". 10.2.7 Therefore, in view of the finding recorded above, the Assessing Officer is directed to assess the interest income under the head "Profits and Gains of Business or Profession" and to allow all consequential benefits flowing therefrom, including set-off of brought forward / current year business losses and allowance of eligible business expenditure, strictly in accordance with law.”

Order pronounced in the open court on 12/08/2026

Sd/- Sd/- MAKARAND VASANT MAHADEOKAR CHALLA NAGENDRA PRASAD ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 12/08/2026 Prabhat Copy to: DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 8(1), MUMBAI, ROOM NO. 656, 6TH FLOOR, AAYKAR 1 BHAVAN, MUMBAI-400020, MAHARASHTRA NOVASYNTHETIC PRIVATE LIMITED, OFFICE NO. 1 1ST FLOOR RANG BHAVAN 2 (PATEL HOUSE), M G CROSS ROAD VILLE PARLE (EAST), MUMBAI-411057, MAHARASHTRA 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE