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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner (Appeals) – 12, Mumbai and arises out of the order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:
i. The Ld. CIT(A) has erred in law and facts in confirming the order of AO in disallowing the expenses of Rs. 15,56,592/- ignoring the written submission without giving any reasons. ii. The Ld. CIT(A) has erred in law and facts in upholding that these expenses are attributable to exempt income or income from House
Property and not to interest income. He ought to have allowed expenses against interest income. The Ld. CIT(A) has failed to appreciate that interest income is business income. iii. The Ld. CIT(A) has erred in law and facts in observing that these expenses may be sham or related to other earning activities carried on by the appellant or others without basis and without giving any evidence. It is apparent that appellant has not carried on any other activity as envisaged by Ld. CIT(A).
Briefly stated, the facts are that the assessee filed its return of income for the A.Y. 2010-11 on 09.10.2010 declaring total income at Rs.2,35,87,146/-. The nature of business of the assessee is trading in shares. On perusal of the P&L account of the assessee, the Assessing Officer (AO) found that the assessee has offered Rs.4,83,58,212/- as other income. It consists of Rs.47,00,725/- earned as Long Term Caplital Gains(LTCG) on shares which has been claimed as exempt u/s 10(38); Rs.39,64,181/- being interest received from auto sweep term deposit with Kotak Mahindra Bank, fixed deposit with Axis Bank, Electricity deposit with BEST and debentures of L & T finance; dividend income of Rs.74,87,707/- claimed as exempt u/s 10(34) and lease rentals of Rs.3,22,05,600/- received from letting out commercial premises at Maker Chambers.
3.1 The AO held interest income of Rs.39,64,181/- as income from other sources. He found that the assessee has debited expenses of Rs.80,35,828/- against this income. Out of these expenses, the assessee has already disallowed Rs.65,82,531/- in its computation of income. The AO disallowed Rs.15,56,592/- on the ground that “the amount effectively claimed as expenses against interest income is electricity, postage and telephone, office rent, travelling, insurance, printing and stationary, vehicle maintenance, legal and professional fees repairs and maintenance. The assessee is earning interest income for various investments. The character of this income being passive, that is assessee need not carry any organized activity to earn them, no expenses are allowed u/s 57 of the Act.”
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) relied of the judgment of the Hon'ble Madras High Court in the case of South India Shipping Corporation Ltd. vs. CIT (2000) 163 CTR 617 and held that the interest income is liable to be assessed under the head “income from other sources”. The Ld. CIT(A) upheld the disallowance of expenses of Rs.15,56,592/- made by the AO as it was not attributable to earning interest income from fixed deposits etc.
Before us, the Ld. Counsel of the assessee filed in paper book containing a copy of the submission made before the AO and the Ld. CIT(A). He also filed a copy of the order of the ITAT ‘A’ Bench, Mumbai in the case of M/s Kalpana Trading Corporation vs. ITO (ITA No. 6024 & 6025/Mum/2010).
The Ld. D.R. relied on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant material on record. We begin with the order in the case of M/s Kalpana Trading Corporation (supra) relied on by the Ld. Counsel of the assessee. In that case the grievance of the assessee was against the action of the Income-tax authorities in holding that no business activity was carried out by the assessee, thereby denying the claim of loss determined on account of expenses claimed in the Profit and Loss Account. The income under the head “House Property” determined at Rs.17,36,714/- was set off against business loss determined at Rs.24,35,949/- thereby resulting in net loss of Rs.6,99,235/-. In the ensuing assessment, the AO noted that in the Profit and Loss Account, the assessee had not shown any activity of purchase and sale. The AO also noted that even the activity of trading in shares has not been carried out by the assessee for the past several years. As a consequence, the AO determined the taxable income at Rs.17,36,714/- which was the income declared under the head “Income from House Property”. The Tribunal observed that the factual matrix of the case supports the plea of the assessee that it is not a case of discontinuation or closure of business, but temporary lull in activity. The Tribunal allowed the plea of the assessee.
7.1 We find that a similar issue arose before the Hon'ble Madras High Court in the case of South Indian Shipping Corporation Ltd. (supra), relied on by the learned CIT(A). In that case, the assessee is a public limited company engaged in shipping business. For the assessment year 1976-77, it reported an income of Rs.1,75,79,871/- under the head “Business (shipping) income”. Of that sum, a sum of Rs.87,51,231/- was stated to be income by way of interest received on short term bank deposits. The Income-tax Officer treated the income received by the assessee by way of interest on bank deposits as being taxable under the head “Other sources”. The interest paid by the assessee on overdrafts obtained by it were treated by him as expenditure incurred for the purpose of business and was given deduction under that head accordingly. In appeal, the treatment so accorded to the income received by the assessee by way of interest was affirmed by the Commissioner. The Commissioner also affirmed the view of the Income-tax Officer that the interest paid on overdrafts is only to be treated as expenditure for the purpose of business. The Revenue and the assessee having carried the matter in appeal to the Tribunal, the Tribunal held that the interest received on bank deposits, is to be treated as income from other sources and not as income from business. In appeal, the Hon'ble High Court held (i) Under the Income-tax Act, 1961, the distinct heads under which the income of assessee are to be classified are set out in section 14 of the Income-tax Act, 1961. The income received by an assessee has to be fitted under one or other head having regard to the source from which that income is derived. The fact that a person carried on business does not lead to the inference that all income received by such a person is business income. The same assessee can have income which may require to be classified under more than one head. It is the manner in which the income is derived that is relevant and not merely the fact that the person is engaged in a business or in a profession. Interest received by a company which carries on business, from bank deposits and loans could only be taxable as “business income”. (ii) Interest paid on overdraft obtained for the purpose of business cannot be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to taxed under the head “income from other sources”. (iii) However, though the assessee may not be entitled to have interest paid by it on the overdraft to the bank, deducted from the interest received by it on the short term fixed deposits, the assessee is entitled to deduction of the same from its business income.
7.2 Facts being similar, we follow the ratio laid down in the above judgment of the Hon'ble Madras High Court and hold that the AO has rightly brought to tax interest income of Rs.39,64,181/- under the head “Income from other sources”. However, the AO is directed to allow the claim of expenses of Rs 15,56,592/- from the business income of the assessee, after verification. Needless to say the AO would give reasonable opportunity of being heard to the assessee.
In the result, appeal is partly allowed.