The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) ruled that interest income earned by the assessee should be classified as business income, granting the allowance of related expenses.
Samir Networks LLP, appellant-assessee,reported interest income of Rs. 9,96,855 under “income from business and profession” and claimed expenses of Rs. 1,05,20,522, resulting in a net loss. However, the Assessing Officer ( AO ) taxed the interest income under “income from other sources” and disallowed the expense claim, making the entire interest income of Rs. 9,96,855 taxable. The Commissioner of Income Tax ( Appeals ) [CIT(A)] upheld the AO’s decision.
The assessee’s counsel argued that the interest income earned by the company should be treated as business income, and the expenses related to it should be allowed. The counsel pointed out that the company’s Memorandum of Association ( MOA ) and Articles of Association clearly listed financing as its main business activity. Moreover, the company had consistently reported interest income as business income in previous years, which had been accepted by the tax authorities.
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The Revenue authorities rejected this claim, stating that the absence of Non-Banking Financial Company(NBFC) registration meant the interest income should be treated as income from other sources. The counsel explained that the delay in registration was due to procedural matters and did not change the nature of the income. The company also clarified that the financial losses were due to a loan turning bad, resulting in waived interest.
The counsel referred to precedents, including the Supreme Court’s ruling in Radhasoami Satsang v. CIT and the Bombay High Court’s decision in PCIT v. Quest Investment Advisors, which supported the consistent treatment of the interest income as business income and the allowance of related expenses. The counsel requested that the CIT(A)’s order be set aside and the claim be restored.
The tribunal reviewed the case, including the orders of the authorities, and agreed with the assessee’s counsel that the CIT(A)’s decision to treat the interest income as income from other sources and deny the expense claim was incorrect.
The assessee showed that financing was its main business, as listed in its Memorandum and Articles of Association. It had consistently reported interest income as business income in previous years, with no objections from the Revenue Department.
The assessee also explained the losses by pointing out a bad loan that stopped generating interest, which was supported by the balance sheet. Additionally, the assessee had applied for an NBFC license from the RBI, but the application was still pending.
The appellate tribunal found that the Revenue failed to dispute the key facts, including the financing business, the treatment of interest income, and the explanation for the losses. The only arguments from the Revenue were the plausibility of the losses and the absence of an NBFC license. However, these reasons did not affect the character of the income. The absence of the license did not change the fact that the income was from business activities.
The two member bench comprising T.R.Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) therefore ruled that the interest income should be treated as business income, and the related expenses should be allowed. The AO was directed to follow this decision.
In short,the appeal filed by the assessee was allowed.
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