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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI D.T. GARASIA, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by revenue for Assessment Year [AY] 2012- 13 assails the order of the Ld. Commissioner of Income-Tax (Appeals)- 16 [CIT(A)], Mumbai, Appeal No. CIT(A)-16/IT-270/DCIT9(1)(1)/2014-15 dated 27/10/2015. The assessment for impugned AY was framed by Ld.
ITA.No.103/Mum/2015 Basons Investments Private Limited Assessment Year-2012-13 Deputy Commissioner of Income Tax-9(1)(1), Mumbai [AO] u/s 143(3) of the Income Tax Act,1961 on 18/02/2015. The revenue has raised following effective grounds of appeal:- 1. “The Ld. CIT(A) erred in holding that the interest income was assessable as business income relying on decision of the Bombay High Court in the case of Karsondas Ranchhoddass (83 ITR 1) ignoring the fact that in that case there was a period of inactivity between two periods of activity, which was not the fact in the present one”. 2. “The Ld. CIT(A) erred in deleting the disallowance on account of interest on the ground that since interest income had been assessed as business income, such expenses were allowable ignoring the finding given by the AO no nexus existed between the interest bearing borrowed fund and interest yielding investment and therefore, notwithstanding the interest income held as business income, such interest expenses was disallowable u/s.36(1)(iii) of the Act.”
2.1. Facts leading to the same are that the assessee being resident corporate assessee engaged as builders, developers & business of investments was assessed u/s 143(3) for impugned AY on 18/02/2015 at Rs.669.78 Lacs under normal provisions as against returned income of Rs.159.66 Lacs e-filed by the assessee on 08/09/2012. The subject matter of this appeal is head under which certain interest income earned by the assessee would be assessable to tax and also the allowability of certain interest expenditure as business expenses. 2.2 During assessment proceedings, it was noted that the assessee did not carry out any business activity since financial year 2009-2010. The credit side of profit & loss consisted of rental income, interest income, Loss/Gains on Shares / Mutual Funds & dividend income. The only dispute in present appeal is with respect to interest income and interest expenditure. 2.3 It was noted that the assessee earned interest income from Fixed Deposits [FDR] to the tune of Rs.420.94 Lacs & interest income of ITA.No.103/Mum/2015 Basons Investments Private Limited Assessment Year-2012-13 Rs.8.81 Lacs on loans granted by the assessee whereas it paid interest on Bank Overdraft Accounts & unsecured Loans obtained from directors to the tune of Rs.319.06 Lacs and offered net interest income of Rs.110.69 Lacs under the head Business Income. The Ld. AO also noted that the amount of FDR far exceeded the borrowed funds and were in existence in the Balance Sheet since a long time and therefore, the investment being out of surplus funds was assessable under the head Income from other sources against which only direct expenditure could be allowed to the assessee. The Ld. AO further opined that the assessee paid exorbitant rate of interest on loans obtained from directors ranging from 15% to 30% which, at maximum, could be allowed @12% in terms of Section 40A(2)(b) and hence, worked out differential interest disallowance to the extent of 120.66 Lacs. Similarly, after analysis of Bank overdraft accounts, Ld. AO concluded that borrowed funds were diverted for various purposes, which were not wholly and exclusively linked with either earning interest on FDR or rental income earned by the assessee. Finally, Ld. AO reached a conclusion that total interest expenditure of Rs.319.06 Lacs as claimed by the assessee could not be allowed to him against interest income or under the head business income.
Aggrieved, the assessee contested the same with success before Ld. CIT(A) vide impugned order dated 27/10/2015 where the assessee while placing reliance on several judicial pronouncements, drew attention to the fact that investment activity constituted business of the assessee and interest income earned by assessee, in similar manner, right from AY 2000-01 to AY 2010-11 was assessed as Business Income. The Ld.
ITA.No.103/Mum/2015 Basons Investments Private Limited Assessment Year-2012-13 CIT(A) after perusing object clause in the Memorandum of Association of the assessee and placing reliance on several decisions including the decision of Hon’ble Bombay High Court rendered in Karsondas Ranchhoddass Vs. CIT [83 ITR 1] & also on CIT Vs. Paramount Premises [190 ITR 259] concluded that interest income was rightly assessed as Business Income. As a logical consequence, Ld. CIT(A) further concluded that interest expenditure had direct nexus with assessee’s business and therefore, the same was allowable in full u/s 37(1). Aggrieved, the revenue is in further appeal before us.
The Ld. Departmental Representative [DR] placed reliance on the stand of Ld. AO and contended that interest on FDRs had to be assessed as Income from Other Sources since it was admitted fact that the assessee did not carry out any business activity since Financial Year 2009-2010 and FDRs were created out of surplus funds. The Ld. DR further contended that borrowed funds were diverted for non business purposes and hence, the interest expenditure could not be allowed to the assessee under any head. Per Contra, Ld. Counsel for Assessee [AR] reiterated the contentions as raised before Ld. CIT(A) and placed on record a chart showing treatment of interest income right from AY 2003- 2004 onwards.
We have heard the rival contentions and perused relevant material on record. First of all, we observe that Ld. CIT(A) has noted that one of the main object of the assessee as per Memorandum of Association was investment activity which is nowhere disputed by the revenue. Secondly, the perusal of interest chart for various years as placed on record reveals that interest income earned by assessee since AY 2003-04 has ITA.No.103/Mum/2015 Basons Investments Private Limited Assessment Year-2012-13 been assessed under the head business income only by the revenue in various assessments u/s 143(3) as well as processing u/s 143(1). Hence, following rule of consistency, we concur with the stand of Ld. CIT(A) and see no reason to interfere with the same so far as the head under which interest income was assessable, is concerned. Resultantly, the first ground of revenue’s appeal stands dismissed.
The second ground is related with claim of assessee qua interest expenditure. Since we have already concluded that interest income was assessable under the head business income, the admissibility of interest expenditure has to be tested under the provisions of Section 36(1)(iii) & Section 37(1). As per the provisions of Section 37(1), the expenditure incurred wholly and exclusively for the purposes of business are allowable as business expenditure and further interest on borrowed capital used for assessee’s business is allowable u/s 36(1)(iii). A perusal of the quantum assessment order reveals that Ld. AO, after analysis of borrowed funds, noted that the same were diverted / used for activities like carrying out Share Transactions, foreign travelling, purchase of property, payment of insurance for directors of the company, investment in tax free bonds etc. Further, The Ld. AO, in the alternative, has computed separate disallowance u/s 14A to the tune of Rs.113.50 Lacs towards interest expenditure since the assessee made suo-moto disallowance u/s 14A to the tune of Rs.11.88 Lacs towards expenditure but did not make any disallowance qua interest expenditure. The Ld. CIT(A) has deleted the same on the premises that own funds far exceeded the investments made by the assessee. However, since AO has noted diversion of borrowed funds for non-business purposes and