THE issue before the Bench is - Whether interest income earned by assessee-developer through housing finance activities is to be treated as income from other sources u/s 56 and not business income. YES is the answer.
Facts of the case
A) The assessee is a developer. During assessment, the AO noticed that the assessee had claimed interest income as business income instead of assessing it under the head 'Income from Other Sources'. The assessee had explained that its main object was the development of property, but because of a lull in the real estate market it had decided to embark on the housing finance business, passing a resolution by its Board of Directors to that effect, besides seeking a clarification from the Reserve Bank of India (RBI). The RBI had clarified that no separate permission from it was required for the purpose, i.e., to commence the housing finance business. Therefore, on this basis that the interest income was claimed for being treated as a business receipt. The AO however, rejected such submission and also in view of his finding of the assessee not carrying on any business during the year restricted expenditure in respect of filing fees; bank charges; and audit fees, being the statutory, minimum charges payable by the assessee in view of its status as a company.
The CIT had passed a revision order directing the AO to consider the allowability of the various expenses claimed by the assessee in terms of section 57. However, on appeal, the CIT(A) had confirmed the order passed by the AO and held that AO had given his finding in the order as to which of such expenses had nexus to earn interest 'income'. Thus, he confirmed the same.
B) Another issue raised by the assessee was that the AO observed that assessee had paid a sum of Rs. 17 lakhs toward booking of two shops. While the conveyance was agreed to be executed within a period of three years, neither the possession of the property had been taken by the assessee-company after nearly a decade, nor the amount recovered. The assessee clarified it to be an advance for office premises. The AO thus held the advance to be a loan to the payee and, accordingly, interest computed @ 12% p.a., bringing an amount of Rs. 2,04,000/- as income from other sources.
The Tribunal held that,
A) ++ the Revenue's stand of the interest income being, under the circumstances, not arising out of business activity is unmistakable. To begin with, the object of advancing of loans is only an ancillary or an incidental object, i.e., to the attainment of the main object/s, which continues to be of development of property. The assessee states a lull in the real estate market as a reason for not embarking on the said business. The said contention is not only wholly unsubstantiated, but against common observation as well. Why, how could, one may ask, housing finance business or even for properties in general, thrive under the condition of a lull in the real estate market? The assessee, thus, only contradicts itself. Further, there is no evidence of any organized activity or embarking on housing finance business in any manner. The loan, given to a director, prior to the stated decision of change in the business, is not shown to be for the purchase or acquisition of any house property. Further, rather than the same being recalled, it continues to outstand year after year, with even the interest thereon being not received or recovered. The interest income, under the circumstances, which are admitted and borne out by the record, would necessarily fall to be classified for assessment purposes under the residuary head of income, i.e., as income from other sources, or u/s. 56. We find the reliance by Revenue on the decisions in the case of South India Shipping Corporation vs. CIT and Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT- 2002-TIOL-489-SC-IT-LB for the purpose as apposite;
++ the foregoing would make it abundantly clear that the said expenditure is general expenditure incurred for various functions/activities, ostensibly for maintaining the establishment of the assessee's undertaking. The same would thus not fall to be covered within the compass of section 57(iii), given its limited scope, i.e., for earning income, and which is only the interest income on a single loan granted by the assessee to, one, Maneklal Bhandari. In fact, the expenditure allowed, i.e., on filing fees, bank charges and audit fee, would, again, strictly speaking, not fall within the purview of section 57(iii), and stands allowed on being the minimum statutory expenses required to be incurred in view of the legal requirement incident on the assessee as a company. The decision by the AO, since endorsed by the CIT(A), cannot, therefore, be faulted with. We decide accordingly, dismissing the assessee's ground in result;
B) ++ why is the builder or the seller not brought to book or to account for the same, especially considering that the property was supposed to have been delivered within a period of three years, and which expired years ago. Funds have opportunity cost and, besides, this considerably impairs and dislocates the company's activities/business, causing substantial loss. In fact, the business was never been able to be commenced. In a normal, commercial transaction, such a dispute or imbroglio would have been either resolved or damages claimed, seeking, in any case, adequate compensation. In fact, even the status of the completion of the property, i.e., with regard to time, is not known. The assessee's case is in fact wholly un-evidenced. Under the circumstances, we do not find any infirmity in the Revenue inferring the said transaction to be in fact representing a loan to the payee under the garb of purchase of property, and not a genuine business transaction and, accordingly, endorse the same;
++ however, we inclined to, however, not to impute or assign any interest cost thereto. When the principal amount itself is not forthcoming, there is great uncertainty in collecting interest, which has not been provided for. The same can, under the circumstances, be either agreed to between the parties, or directed by a third party, as an arbitrator, for example, to whom the parties may approach, or a court of law. We are conscious, when we state so, that we presume a normal, genuine problem on hand, while the Revenue's case is based on the transaction, as being reflected, in the absence of any evidence, as not true, raising serious and valid doubts with regard to its genuineness. True, but that would not by itself imply of the assessee-company to have benefited, at the cost of the payee, to any extent. Tax, it is trite law, can only be charged on real income, while we find no basis for inferring the interest cost on the part of Revenue. We decide accordingly, and the assessee succeeds on this ground.