SWIRE HOLDINGS PVT LTD,BANGALORE vs. THE INCOME TAX OFFICER WARD-12(2), BANGALORE

The grounds raised

by the assessee are as under. “1. The Commissioner of Income-tax (Appeals) erred both in Law and on the Facts of the Case in holding that the interest of Rs.1,89,025/- should be assessed under "Other Sources".

Brief history of this case is this that the assessee is engaged in real estate business. In the present year, the AO taxed a sum of Rs. 1,89,025/- as income from other sources although this was the claim of the assessee that it has earned this income as business income. This was the contention that the assessee advanced money in order to buy land for the purpose of carrying on business activities and since, the said transaction could not be finalized, the advance was returned along with interest and the same is offered to tax under the head business income. The revenue rejected this contention on the ground that the assessee during the relevant assessment year has not even commenced the business and therefore, interest earned is income from other sources. When the assessee carried the appeal in appeal before CIT(A), the assessment order was confirmed but further appeal was filed by the assessee before the Tribunal and it was held by Tribunal that this interest income should be assessed as business income. The revenue filed appeal before the Hon'ble Karnataka High Court against this Tribunal order. The Hon’ble Karnataka High Court remanded the matter back to the file of AO for fresh decision with the direction that if the interest is received by the assessee along with the refund of arrears amount paid by the assessee, it has to be treated as income from business but if the assessee had earned interest by lending money or investing the amount in any financial institutions, such interest has to be treated as income from other sources. As per the direction of Hon’ble High Court, the AO framed the fresh assessment order on 24.12.2010. In the same, the AO has noted that the assessee has not provided any substantial evidence to support its claim that the transaction between the assessee company and M/s. Ace Properties Developers P. Ltd. was a business transaction. The AO has also noted the comments of the auditors in the auditors’ report as per which, the assessee company has granted loans and advanced in the nature of loans including the loan in question given to Saphire investments Private Limited and Ace Properties Pvt. Ltd. The AO assessed this interest income as income from other sources. The assessee again carried the matter in appeal

The ld. AR of assessee made various submissions but she could not establish that the interest received by the assessee in the present year is along with the refund of arrears amount paid by the assessee as has been held by Hon’ble Karnataka High Court and under this situation, the comments of auditors in the auditors’ report assumes more significance and without any evidence in support of assessee’s claim that it has given money as advance for purchase of land and received back the interest on refund of such advance given for purchase of land, the comments of the auditors has to be accepted that this was the loan transaction and after accepting that, as per the judgement of Hon'ble Karnataka High Court in assessee’s own case, the interest income has to be assessed as income from other sources but I also find that as per the P & L account of the assessee made available on record, there are various expenses incurred under various heads to the extent of Rs. 19,06,156.70/- and none of the authorities below has examined this aspect as to whether any amount of expenditure out of this total expenditure is incurred for earning of the interest income in question assessed as income from other sources and this is very important because even if this income is assessed as income from other sources, it has to be seen as to whether any expenditure is allowable u/s. 57 (iii) of the IT Act. This exercise was not done by any of the authorities below and hence, I restore the matter back to the file of AO for carrying out this exercise with the direction that he should decide the issue on this aspect as to whether any deduction is allowable u/s 57 (iii) against interest income assessed by him as income from other sources although I uphold this action of the AO that interest income is assessible as income from other sources. For the limited purpose of deciding this aspect as to whether any deduction is allowable u/s. 57(iii), the matter is restored back to the file of AO for fresh decision after providing adequate opportunity of being heard to the assessee.