Interest earned from Income Tax Department & staff loans to be assessed under 'other sources'; Interest on Credit sales is business income; When profit is negative, deduction under Section 80 HHC is nil
NEW DELHI, MAR 27, 2008 : SEVERAL issues are before the ITAT in this appeal.
Interest income whether in nature of business income or income from "other sources". The assessee had claimed interest income of Rs, 48,61,34,002/- as business income. It was explained by the assessee before the Assessing Officer that the interest was earned during the course of business on the surplus funds generated on a day to day basis from short term deposits, from customers against credit facility extended, from staff advances etc. The interest income was integral part of the assessee's business and, therefore, the nature of interest income was that of business income. However, Assessing Officer relying on several decisions held that the interest income was in nature of other sources.
The Tribunal observed/held: The assessee earned interest income from banks to the extent of Rs. 27,71,63,000/-. The interest income is liable to be assessed as business income or income from other sources has to be examined in the light of the decision of Delhi High Court in the case of Sri Ram Honda Power Equipment Ltd. Since the AO has not examined the nature of interest earned, we direct the Assessing Officer to examine the nature of interest income earned and decide the issue in the light of decision of Hon'ble Delhi High Court.
Interest earned from Income Tax Department: the assessee has fairly conceded that the interest earned on refunds from Income Tax Department is to be assessed under the head "other sources". Accordingly this issue is decided against the assessee.
Interest earned on credit sales: ITAT in assessee's own case for A.Y. 2003- 04 in ITA No. 1722/Del/2006 held that the income was assessable under the head 'business income' Respectfully following the precedent it is held that interest earned on credit sales is to be assessed under the head "business income".
Interest earned on staff loans: similar issue came up before ITAT in assessee's own case for A.Y. 2003-04 wherein interest on staff loans has been treated as income from other sources. Respectfully following the precedent in assessee's own case it is held that interest earned from staff loans being an incidental activity carried on by the assessee is liable to be assessed as income from other sources.
Tax free income on investment and interest paid on loans? the assessee earned tax free income from the funds utilized in investment, on the other hand the assessee had taken loans to run its business and the interest on which has been claimed as business expenditure. Therefore, the interest paid on loans was directly related to earning tax free income from the investment made from surplus funds. The Assessing Officer by invoking the provisions of sec. 14A disallowed the interest of Rs. 2,39,85,130/-. On appeal ld. CIT(A) upheld the stand taken by Assessing Officer.
Tribunal observed: The Assessing Officer has apportioned the interest paid in the ratio of investments made resulting in exempted income to the total assets. The assessee has not furnished information that investments in units were made out of surplus funds. The investment in units was made in financial year 1990- 91. In that year dividend income was not exempt. If the investments were made out of borrowed funds in the year of acquisition of units, and such loans are still continued, there is no reason as to why the interest paid in respect of investment in units should not be disallowed. There may be another situation under which the loans taken for the purpose of investments made in units were repaid out of funds borrowed subsequently, the interest payment on such funds will relate to exempted income and will be disallowable. For A.Y. 1993-94, ITAT Delhi Bench "A", New Delhi in order in ITA No. 1193/Del/2000 in dated 27.04.2007 held direct expenditure relatable to exempted income was Rs. 12,35,200/- which was to be deducted. For assessment year under consideration we do not have any such details on records. Since this information is not available on record, we are unable to decide this issue. Accordingly, we are of the considered view that this issue be restored to the file of the Assessing Officer for determination of the issue afresh after obtaining the relevant information from the assessee We order accordingly. Remanded.
computation of deduction us/ 80HHC. The Assessing Officer computed profits from export of goods and mercantile at Rs. 50,75,38,235/-. The deduction u/s 80HHC to be allowed to supporting manufacturers was worked out at Rs. 24,12,65,023/-. Thus, the deduction allowable to the assessee was determined at Rs. 26,62,73,212/-. The Assessing Officer disallowed the claim of the assessee on the ground that the profits from business was determined at a loss of Rs. 13,57,30,643/-.
Tribunal observed: The Assessing Officer computed the business income for the purpose of deduction u/s 80HHC at loss of Rs. 13,57,13,643/-. Under section 80HHC(1) deduction is to be allowed to the extent of profits derived by the assessee from the export of such goods and merchandise. Sub-sec. (3) is machinery section according to which deduction u/s 80HHC is to be computed. The assessee in the return of income computed profits of business at Rs. 30,41,04,281/-. The Assessing Officer deducted there from the dividend income, disallowance made u/s 14A and interest income and arrived at loss of Rs. 13,57,30,643/-. There is no dispute that dividend income is to be assessed under the head 'other sources'. The assessee has accepted the determination of interest income and has also not disputed the computation of loss from business Provisions of sec 80AB deals with the allowability of deduction under chapter VIA with reference to income included in the gross total income
From the plain reading of sec. 80AB it is clear that the deduction under chapter VIA under the heading "C-Deductions in respect of certain incomes" can be allowed only in respect of income of the types included in the gross total income. Deduction u/s 80HHC is allowable on the profits included in the business income of the assessee. In the case before us, the export profit included in the business income is a negative figure as is evident from the computation made by the Assessing Officer in the assessment order. Therefore, in view of provisions of section 80AB, deduction u/s 80HHC will be nil.
Netting of interest expenses against interest income – remanded . Tribunal held that this issue is covered by the decision of Delhi High Court in the case of CIT Vs. Sri Ram Honda Power Equipment ( Del) wherein it has been held that the word "interest" in clause (baa) of the Explanation to sec. 80HHC connotes "net interest" and not "gross interest". Therefore, in deducting such interest the Assessing Officer will take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. Since the Assessing Officer has not carried out any exercise in relation to the netting of interest, we set aside this issue to the file of the Assessing Officer with the directions to decide the issue in the light of decision of Hon'ble Delhi High Court in the case of Sri Ram Honda Power Equipment ( Del) (supra).
Charging of interest u/s 234B and 234C of the Act. Since charging of interest under these sections is mandatory in view of decision of Hon'ble Supreme Court in the case of Anjum M.H. Ghaswala 252 ITR 1, Tribunal upheld the charging of interest under these sections.
(See 2008-TIOL-133-ITAT-DEL in 'Income Tax' + 2008-TIOL-133-ITAT-DEL in 'Legal Corner')