ITAT Ahmedabad upholds Classification of Interest Income from Employee Loans as Business Income [Read Order]

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has delivered a noteworthy decision, affirming the classification of interest income from employee loans as "business income." In a ruling challenging conventional views, the tribunal dismissed the Revenue's appeal, highlighting the strong connection between employee welfare measures and business operations.

The assessee, M/s. Gujarat State Electricity Corporation Ltd., being a power generation company, had its interest income earned on loans and advances provided to employees treated as "income from other sources" under Section 56 of the Act, instead of "business income," by the Assessing Officer (AO).

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The AO made this classification in two separate orders, dated February 25, 2015, and December 28, 2018, for Rs. 4,56,05,000 and Rs. 8,00,35,000, respectively.

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The main issue in this case was whether interest income from employee loans should be classified as "business income" or "income from other sources."

The AO treated it as "income from other sources," arguing that the assessee’s main business was power generation, not lending, and that the loans benefited employees personally.

The CIT(A) ruled in favor of the assessee, stating that the loans were exclusively for employees, making them incidental to the business. Relying on the Orissa High Court’s ruling, Odisha Power Generation Corporation Ltd., the CIT(A) held that such interest income qualifies as "business income."

The Revenue Department aggrieved by this decision, moved to the ITAT.

The assessee, represented by counsel Manish J. Shah, argued that the income was part of normal business operations. He supported this argument by relying on the CIT(A)'s order and citing a similar ruling from the Gujarat High Court in Gujarat Urja Vikas Nigam Ltd.

The Departmental Representative (DR), Prathvi Raj Meena, argued against this. The DR said the assessee's main business was power generation, not lending. Since the loans were for employees’ personal use, the interest income should be taxed as "income from other sources."

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The DR also tried to differentiate this case from Odisha Power Generation Corporation Ltd., where additional charges for electricity and water were collected, creating a stronger link to business operations.

The ITAT bench, consisting of T.R. Senthil Kumar ( Judicial Member ) and Makarand V. Mahadeokar (Accountant Member), found the Department's distinction irrelevant and upheld the CIT(A)’s findings. They confirmed that interest income from employee loans is linked to business operations and should be classified as business income, rather than income from other sources.

The loans were given to employees for their welfare and retention, strengthening the connection to the business and justifying the classification as "business income." Judicial precedents cited by the assessee supported this ruling.

The ITAT, therefore, dismissed both Revenue appeals.

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To Read the full text of the Order CLICK HERE

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