MEENAKSHI ENERGY AND INFRASTRUCTURE HOLDINGS PRIVATE LIMITED,HYDERABAD vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1), HYDERABAD

The assessee raised the following grounds:

Facts of the case, in brief, are that the assessee is a private limited company engaged in the business of investment and finance, filed its return of income for the A.Y 2018-19 on 30.10.2018 declaring total income of Rs ’nil’. The case was selected for scrutiny and during the course of assessement proceedings, the Assessing Officer noticed that the assessee has declared income under the head income from business and profession of Rs.17,21,19,022/-. It was further noticed that in the return of income filed for the earlier A.Ys, the assessee has not shown any business income and income from operations. The Assessing Officer further noticed that the assessee has credited interest income under the head other income and has treated as income from business. Therefore, called upon the assessee to explain as to why the interest income is assessable under the head income from business and also set off of brought forward business can be claimed against interest income. In response, the assessee submitted that the company is into the business of investment and finance as one of its objects as per the Memorandum and Article of Association and further, the assessee has given inter-corporate deposits as its business activity on which it has received interest income. Therefore, claimed that interest income has been rightly assessed under the head business income and also brought forward losses has been rightly claimed in terms of section 72(1) of the I.T. Act, 1961.

The Assessing Officer however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the main business activity of the assessee is power generation and infrastructure, but not investment and finance as claimed by the assessee. Further, the assessee has not declared any income from operations and it has disclosed only interest income under the head “other income” in the financial statement and from the above, it is very clear that except interest income from inter corporate deposits, there is no other business activities carried out by the assessee. Further, the assessee has declared interest income under the head income from other sources for the earlier A.Ys. Therefore, without there being any changes in facts, the question of changing the head of income in respect of interest income earned from inter corporate deposit is only an after thought to claim benefit of set off of brought forward business losses. Therefore, rejected the explanation furnished by the assessee and assessed interest income under the head “income from other sources”. The Assessing Officer had also denied the set of brought forward business losses in terms of section 72(1) of the I.T. Act, 1961 on the ground that brought forward business losses can be set off against business income only.

Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT (A). Before the learned CIT (A), the assessee has reiterated its submissions made before

The learned CIT (A) after considering the relevant submission of the assessee and also taken note of the reasons given by the assessee to assess interest income under the head “income from business” submitted that the treatment of interest income received from inter-corporate deposits as income from

Aggrieved by the order of the learned CIT (A) the assessee is in appeal before the Tribunal.

The learned Counsel for the assessee submitted that the learned CIT (A) erred in upholding the action of the Assessing Officer in treating interest income earned by the assessee as income from other sources and not income from business/ profession. The learned Counsel for the assessee further submitted that although the assessee is into the business of generation and distribution of energy, but its memorandum also provides for carrying out the business activities of investment in shares/stocks, debentures and securities and to finance industrial enterprises and to carry on the business of an investment company. If you go by Article 76 of Memorandum of Articles of Association, the objects provided for carrying out investment and for finance activity. The assessee in pursuant to its objects has carried out investment and has earned interest income. Therefore, the argument of the authorities that interest income earned from inter-corporate deposits is not a business activity is incorrect. The learned Counsel for the assessee further submitted that there is no dispute with regard to the fact that for earlier A.Ys interest income has been offered under the head income from other sources, but the fact remains that the principle of res judicata is not applicable to the income tax proceedings. Although the principle of consistency needs to be followed but the fact remains that in case any mistake is committed in giving

The learned DR, on the other hand, supporting the orders of the learned CIT (A) submitted that the interest income from inter corporate deposits cannot be considered as business income at any stretch of imagination. Once interest income is considered as income from other sources, then set off of brought forward business cannot be allowed in terms of section 72(1) of the I.T. Act, 1961. The Assessing Officer and the learned CIT (A) after considering the relevant fact that the assessee has admitted interest income under the head income from other sources for the earlier A.Ys has rightly assessed interest income under the head income from other sources and consequently denied the benefit of

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the memorandum of association of the appellant company provides for carrying out business activities of investment in shares/stocks, debentures and securities and also to carry out the business of finance. If the objects in the memorandum of association provides for carrying business activities, than any business activity carried out by the assessee as ancillary and incidental to the attainment of its main business activity, can be considered as one stream of business activity. Therefore, to this extent we are in agreement with the argument of the learned Counsel for the assessee that the interest income earned from inter-corporate deposits is assessable under the head business but not income from other sources. Since the assessee is carrying out the business activity of providing inter-corporate deposits and earned interest income, in our considered opinion, interest received is assessable under the head income from business and profession. In so far as the argument of the learned CIT (A) that, in order to assessee a receipt as a business receipt, it should be real, substantial, systematic or organized activity that has a profit motive, in our considered opinion, a solitary transaction can also be considered as an activity in the nature of business

Having said so, let’s come back to the issue that the entries in the books of account is determine the nature of head of income and further treatment of a particular receipt from one head of income in earlier A.Y is sacrosanct or the assessee can change the method of accounting or head of income, if facts and circumstances demands such changes. The Hon'ble Supreme Court in the case of CIT vs. Kedarnath Jute Manufacturing Company Ltd (Supra) has held that the entries in the books of account cannot determine the nature of income. Further, it is the nature of receipt alone can decide the head of income. Therefore, merely because the assessee has treated interest income under other income in the books of account, cannot be a reason to come to the conclusion that the said receipt is assessable under the head income from other sources and not under income from business and profession. Further, the reasons given by the Assessing Officer and the learned CIT (A) to assess interest

In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that the assessee has rightly offered interest income received from inter corporate deposits under the head income from business and profession and also claimed set off of brought forward losses. The Assessing Officer and the learned CIT (A) without appreciating the relevant facts erred in treating the interest income earned by the assessee as income from “other sources” and not “business income” and denied the benefit of set off of brought forward business losses. Thus, we set aside the order of the learned CIT (A) and direct the Assessing Officer to assess the interest income under the head income from business and profession as claimed by the assessee and also allow the set off of the brought forward losses.

In the result, appeal filed by the assessee is allowed.