SAMIR NETWORKS LLP(PREVIOUSLY KNOWN AS SAMIR STOCKHOLDINGS PVT. LTD.),AHMEDABAD vs. THE ACIT, CIRCLE-4(1)(1), AHMEDABAD

आदेश/O R D E R

PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER

2. Grounds raised by the assessee are as under:

“1. The learned Commissioner of Income Tax (Appeals) ("CIT(A)") has erred in confirming the treatment of the interest income earned as income from other sources instead of as business income by the assessing officer ("AO") on the ground that appellant company does not have a license from RBI as NBFC in as much as (i) The appellant company is carrying on NBFC activities and that classification of income is based on the nature of activities on a regular basis; and (ii) Interest income has been consistently taxed as business income in earlier years and there is no change in facts in the current year.

2. The learned CIT(A) has erred in confirming the disallowance of expenses of Rs 1,05,20,522 as per financial statements on the ground that is excessive and they are incurred with a view to reducing tax liability in as much as expenses are genuine and the same are incurred wholly and exclusively for the purpose of business.

3. Without prejudice to Ground No.2, expenses of Rs.1,05,20,522 include depreciation as per books of Rs. 13,05,261 which is already disallowed in the computation of income.

4. Without prejudice to the above, the learned CIT(A) ought to have directed the AO to give a deduction of expenses under Section 57 against interest income and that reliance placed on the decision of SC in the case of Goetze India 284 ITR 323 by the AO is misplaced.”

3. At the outset, it is noted that there is a delay of 26 days on the part of the assessee in filing the appeal before the Tribunal. In this regard, the assessee has filed an Affidavit dated 20/07/2024 seeking condonation of the said delay on the following grounds:-

I, SAMIR NAVINCHANDRA PATEL, Partner of Samir Networks LLP [Converted from Samir Networks Private Limited (Previously known as Samir Stockholdings Pvt. Ltd.)] at 8, Abhishree Residency - 2, B/h. Kantam Party Plot, Bopal, Ahmedabad - 380058 hereby solemnly affirm that the order under Section 250 dated 21-02-2024 was passed against the assessment order under section 143(3) dated 17-12-2018 dismissing the appeal of the appellant company. However, such an order was not served upon the appellant company. The appellant company has not received such an order on the registered mail ID of the appellant company on the income tax portal. However, the appellant company came to know about such an order when the accountant of the company logged in on the portal for some other work.

Samir Networks LLP vs.ACIT AY : 2016-17 3 As soon as the appellant company came to know about the order it immediately filed an appeal. As there is no service of the order, the delay is on account of reasonable cause. As the delay of 20 days (assuming the date of order as the date of service of order) is on account of a reasonable cause, your honours are prayed to condone the delay in filing of such appeal and admit the appeal and oblige. The nature of business is such that I am not required to access the email id on regular basis. I tender my apology for the same. Whatever stated above is true and correct to the best of my knowledge and belief.” Keeping in view the reason given by the assessee in its application for condonation of delay, we are satisfied that there was a sufficient cause for the delay of 26 days on the part of the assessee in filing the appeal before the Tribunal and even learned DR has not raised any material objection in this regard. We, therefore, condone the said delay and proceed to adjudicate the appeal.

4. Referring to the above grounds of appeal raised by the assessee, the ld.counsel for the assessee stated that, the solitary issue in the present appeal, was the treatment of the income returned by the assessee under the head “business income” as an “income from other sources” and thereafter denial of expenses claimed against the same by the assessee, resulting in the entire business receipts of the assessee being subjected to tax ,as supposed to loss returned by the assessee.

The ld.counsel for the assessee drew our attention to the facts of the case by pointing out that the assessee had returned interest income of Rs.9,96,855/- under the heard “income from business and profession” and has claimed expenses to the tune of Rs.1,05,20,522/- against the same. Thus, the assessee has returned net loss under the head “business and profession”. The AO treated this interest Samir Networks LLP vs.ACIT AY : 2016-17 4 income as taxable under the head “income from other sources” and further denied any claim of expenses against the same, resulting in the entire interest income of Rs.9,96,855/- being subjected to tax. The Ld.CIT(A) confirmed the same.

The argument of the ld.counsel for the assessee, before us, was that despite the assessee demonstrating that it was in the business of financing and had returned identical interest income from year-to- year under the head “business income” and also claimed expenses against the same, both the Revenue authorities had rejected the assessee’s claim and treated the interest income as taxable income from other sources denying any claim of expenditure against the same for no plausible reason at all. He pointed out that the only reason given by both the AO and the CIT(A) for not treating the “interest income” as “business income” of the assessee was that the assessee was not registered as the NBFC by the RBI. The ld.counsel contended that, firstly, a certificate of registration under NBFC was not necessary for determining the character of income earned by the assessee. He contended that the fact that its Articles of Association and Memorandum of Association clearly listed the financing activity as its main activities showd that earning interest income was related its business activity .Also the fact that the assessee had been returning interest income as its business in the past several years and which had not been disturbed by the Revenue Department, all showed the true character of the interest income earned by the assessee as being from its business activity. He pointed out that, besides, the fact that the assessee’s NBFC registration was not there, the other reason given by the Revenue authorities to disbelieve the claim of the assessee that the interest income was earned from its business Samir Networks LLP vs.ACIT AY : 2016-17 5 activity was the fact that it had earned huge losses in the same, having earned interest income of Rs.9.96 lakhs and incurred expenses of Rs.10.05 crores ,and the claim of the Revenue was that no prudent business man would run its business in this manner. The ld.counsel for the assessee contended that the assessee had given an explanation which was duly substantiated as to why it had not made profits during the year. He contended that it had been pointed out to the Revenue authorities that one of the advances/loans made by it had turned bad for recovery and the assessee was, therefore, not accounting the interest earned on it in its books of accounts. This advance involved substantial amount of interest, which was forgone by the assessee since the principal itself had turned bad for recovery. He contended that the Ld.CIT(A) completely ignored this contention of the assessee, which the assessee had substantiated with its books of accounts and gone on to record an incorrect fact that the assessee had no plausible explanation for incurring huge losses in its alleged business income. In this regard, he drew our attention to the submissions made to the Ld.CIT(A), which was reproduced at para-5.1. of his order as under, bringing out all the above contentions.

“5.1 During the course of appellate proceedings, the written submissions filed by the appellant are reproduced as under: "2.2. The assessee company is engaged in the business of NBFC. The objects as per MOA are as under. "1. To acquire and hold shares, stocks, debenture, debenture-stocks, bonds, obligations and securities issued or guaranteed by any company carrying on business in India and debentures, debenture- stocks, bonds, obligations and securities issued or guaranteed by and Central or State Government.

3. The AO has treated the interest of Rs. 9,96,855 as income from other sources instead of income from business as claimed by the assessee on the ground that the company is not registered as NBFC with RBI. 3.1 In this connection, it may please be noted that the assessee company is carrying on business of financing and investment activities. It has already made application to RBI for obtaining the registration. The assessee company has not accepted any public deposits. So, the assessee company is not at default for obtaining the registration. Moreover, even if the assessee has made default, the assessee has not made any violation of Income tax act which results into disallowance of expenditure incurred for the purpose of business. Under IT Act, the income from business activity of financing and investment is a business income since it is only business of the company. 3.2 The interest income is business income as assessee company is carrying on financing and investment activities. What is relevant for income tax is source of income for business activity. As per MOA, company's object is financing and investing. Merely because registration is pending that itself cannot be treated as income from other source instead of business income. This fact is also accepted by the department since beginning.

3.3 The expenditure of Rs. 1,05,20,521 is incurred wholly and exclusively for the business purpose and therefore there is no question of disallowance. The details of such expenditure is as under. Employee Benefit Expenses Rs.50.63,500 Depreciation as per Books Rs.13,05,261 Other Expense (Incl. donation of Rs. 1,00,000) Rs.41,51,760 Total Rs.1,05,20,521

The Break-up of Expenses of Rs.1,05,20,521 as per P & L Account as under: Particulars For the Year ended on 31-03-2016 For the Year ended on 31-03-2015 Employee Benefit Expenses [As per Schedule-16] 50,63,500 50,10,000 Depreciation as per Books [As per Schedule-6] 13,05,261 6,75,751 Other Expenses [As per Schedule-18] 41,51,760 23,38,628 Total: 1,05,20,521 80,24,379 From the above, it may please be seen that the entire expenditure is for the purpose of business and that it is allowable as deduction against business income. Just because there is no registration as NBFC, the entire expenditure cannot be disallowed. The registration as NBFC is governed by rules of RBI. The matter is pending before RBI. However, it has no relation under the Income-tax act. The assessee is carrying business of financing and investment activities and therefore the interest earned is a business income and not income from other sources. 3.4 It may please be noted that the business activity of the company is a business income which is accepted since long. The AO has also accepted the same in Para No. 3 of the Assessment Order which is reproduced for ready reference:

“3. Since, it is matter of fact that no prudent businessman will spend excessive in order to earn meagre income. If it happens for a year or two then COM it can be because of genuine reasons but the assessee company is following this practice since long, which is a matter of record. It can only happen when the motive is something different what is seems and there is a proper planning. In the instant case, the assessee is showing meagre business income against the huge business expenses. The so-called business income is being received from interest income. The assessee is following this practice since long and in all these years the assessee is having taxable income from other sources. Thus, in the garb of business the assessee is creating business losses and setting off the same against taxable income from other source. Hence, this way the assessee is artificially reducing the taxable income. Therefore, notice u/s. 142(1) of the Act on 25.07.2018 was issued to the assessee. Vide this notice the assessee was requested to furnish the information/details and justify the huge business expenses." From the above, it may please be seen that the AO himself accepts that this practice is followed by the assessee since long. In other words, the interest income is considered as business income since long. There cannot be any motive or planning to avoid tax. This allegation is baseless. The AO has not seen the balance sheet as on 31-03-2016 as per Schedule - 9 Long term Loans and Advances are Rs. 20,81,37,998 which includes the advance of Rs. 17,09,74,123 which is considered as doubtful. The interest is not received from such advances that is why there is interest income which is less. If the interest should have been received 12% than the interest on Rs. 17,09,74,123 would be Rs. 2.40 Crore. The company is in financial difficulty and therefore the interest received is less. If the AO has considered the doubtful debts, he would have not taken a view to treat interest as income from other sources. 3.5 As mentioned above the assessee company is in the business of financing. The interest income earned by the assessee company is as a part of its business activity. The interest income earned is from the loan given by the assessee company to various entities. And therefore the source of such interest income is the business of the assessee and therefore it is chargeable to tax as business income only because the source of income is important factor to determine the head under which it will be taxable. This fact is also accepted by the department since many years 4 From the above, it is clear that the assessee is carrying on business activity since long and that the expenses incurred for business is also as compared to the activity is not high Since this is consistent the method which is accepted by the Department in the past, the AO cannot change the method in this year. The consistent method should be followed. This view is held by the Supreme Court in the case of Radhasoami Satsang V/s. CIT 193 ITR 321 (SC) [copy enclosed]. The Supreme Court held as under "Held, (ii) that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of the exemption of the assessee appellant should not have been reopened. Strictly speaking, res judicata does not apply to income-tax proceedings. Though each assessment year being a unit, what was decided in one year might not apply in the following year, where a fundamental aspect permeating through the different assessment years has been found as fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year." 4.1 This view is also held by the Bombay High Court in the case of PCIT V/s. Quest Investment Advisors P. Ltd. [2018] 96 taxmann.com 157 (Bombay) /[2018] 409 ITR 545 (Bom) (copy enclosed). The Bombay High Court held as under "Held, dismissing the appeal, that for the earlier 10 years and 4 subsequent years the entire expenditure had been allowed against the business income and no expenditure was allocated to capital gains. Once the principle was accepted and consistently applied and followed, the Department was bound by it. The basis for the change in practice should have been mentioned by the department, if it had wanted to change the practice without any change in law or facts therein, either in its order or pointed out when the tribunal passed the order. Therefore, the tribunal's allowing the assessee's appeal on the principle of consistency could not be faulted as it was in accord with the supreme court decision”. 4.2 It may please be noted that there is no change in any facts or in any law. The facts are that the assessee is carrying on business activity of financing and investment since long. There is no change in this fact. It is true that the interest received is less but just because income received is less, there is no change in business activity. Similarly, there is no change in law. Therefore, the assessee is squarely covered by SC judgement and Bombay High Court judgement. The disallowance may please be deleted."

Samir Networks LLP vs.ACIT AY : 2016-17 10 Further, the ld.counsel for the assessee contended that the order passed by the Ld.CIT(A) needed to be set aside and the assessee’s claim of treating the interest income as its business income and allowing the claim of expenditure against it, be restored.

Samir Networks LLP vs.ACIT AY : 2016-17 11 In the backdrop of all these facts brought out by the assessee to the Revenue Authorities, we find that the Department has not made out any case to controvert the stand of the assessee of having earned interest income from business activity. The Revenue does not dispute the fact of the objects of the assessee-company being financing activity, it does not dispute the assessee having consistently returned the interest income in the past several years as “business income”. Neither it does controvert nor point out any infirmity in the explanation of the assessee of having earned losses in the impugned business during the year nor is there any finding of the Department on the contention of the assessee that he had made all efforts to obtain licence as a NBFC with the RBI. The only basis we find by the Revenue for rejecting the assessee’s contention is that the assessee’s explanation for incurring such huge losses is not plausible and that it does not have a NBFC licence. Both these reasons, we do not find impinge in any way on the character of income earned by the assessee and we find that the reasoning that the assessee has no plausible reasons for incurring loss is incorrect.As noted above, the assessee did give an explanation for the same.As for the fact that he did not have any NBFC license, mere absence of licence does not affect the character of income earned by the assessee. The licence only makes the activity carried out by the assessee to be legal activity. In the absence of the licence, may be the activity is illegally carried out but that does not take away the fact that the assessee carried out theactivity as its business. The absence of license has no effect on the character of the income. The fact that the assessee has been returning identical income as business income from year-to-year, strengthens the case of the assessee. We, therefore, agree with the ld.counsel for the assessee that the interest income earned by it to be treated as business income and all the claim of expenses be allowed against the same. The AO is directed accordingly. Thus, all the grounds of appeal raised by the assessee are hereby allowed.

Order pronounced in the Court on 05 December, 2024 at Ahmedabad.