The Karnataka High Court quashed the order of the ITAT as it did not consider the reasoning that while computing capital gains the benefit of indexed cost of acquisition is to be considered for the purpose of computing tax liability under Section 115JB of the Income Tax Act.
The assessee, M/s Best Trading and Agency Limited is a company and was utilized as a special purpose vehicle for restructuring of Kirloskar Electric Company Ltd. Under an arrangement, approved by this court, the surplus on nonmanufacturing and liquid assets including real estate at Bangalore, Pune etc. have been transferred to Special purpose vehicles for disbursement of the liabilities.
The assessee for the Assessment year 2005-06 filed the return of income declaring a loss and subsequently, filed a revised return of income declaring a long term capital loss and total income being income from other sources. The return of income was selected for scrutiny and a notice under Section 143(2) of the Act was issued to the assessee.
The AO passed an order of assessment under Section 143(3) of the Act and disallowed the claim of interest paid to the financial institutions, which was claimed as deduction under Section 57 of the Act as capital expenditure.
The Assessing Officer also invoked the provisions of Section 115JB of the Act and assessed the assessee on book profits without giving the benefit of indexation on the cost of capital assets sold during the year.
The CIT(A) by an order held that there is a close nexus between the interest earned on the fixed deposits and the interest paid to the lenders and the creditors. It was further held that interest received on fixed deposits is not taxable as income from other sources on the principles of diversion by overriding title.
The revenue preferred an appeal before the Income Tax Appellate Tribunal. The Tribunal vide order held that there is no nexus between the interest, income, and expenses, and the appeal preferred by the revenue was allowed.
The division bench of Justice Alok Aradhe and Justice H.T. Narendra Prasad noticed that the Assessing Officer as well as the Commissioner of Income Tax (Appeals) has taken note of the scheme and has held that assessee was utilized as a special purpose vehicle for purposes of distribution of surplus, if any, after clearance of debts of Kirloskar Electric Company.Subscribe Taxscan AdFree to view the Judgment