DCIT, Bangalore v. M/s Best Trading & Agencies Ltd.,, Bangalore

ITA.36/BANG/2010 P AGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'A' BANGALORE BEFORE DR. O. K. NARAYANAN VICE PRESIDENT AND SMT. P. MADHAVI DEVI JUDICIAL MEMBER I.T.A NO.36/BANG/2010 (ASSESSMENT YEAR : 2005-06) DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE -11(2) BANGALORE .. APPELLANT V. M/S. BEST TRADERS & AGENCIES LTD. C/O. KIRLOSKAR ELECTRIC CO. LTD. P. B. NO.555 MALLESWARAM (WEST) BANGALORE 560 055 .. RESPONDENT APPELLANT BY : SHRI. G. V. GOPALA RAO COMMISSIONER OF INCOME-TAX-I RESPONDENT BY : SHRI. NARENDRA SHARMA ADVOCATE O R D E R PER DR. O. K. NARAYANAN VICE PRESIDENT : THIS APPEAL IS FILED BY THE REVENUE. THE RELEVANT ASSESSMENT YEAR IS 2005-06. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF COMMISSIONER OF INCOME-TAX(A)-I AT BANGALORE DATED .05.10.2009 AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S.143(3) O F THE IT ACT 1961. 2. THE FIRST GROUND RAISED BY THE REVENUE IS THAT T HE COMMISSIONER OF INCOME-TAX(A) IS NOT JUSTIFIED IN H OLDING THAT THE INTEREST OF ` 12 80 461/- EARNED ON SURPLUS FUNDS INVESTED IN FIX ED ITA.36/BANG/2010 P AGE - 2 DEPOSITS WAS NOT TAXABLE AS INCOME UNDER THE HEAD ' INCOME FROM OTHER SOURCES' WITHOUT APPRECIATING THE FACTS AND CIRCUM STANCES STATED IN THE ASSESSMENT ORDER. IT IS THE CASE OF THE REVENU E THAT THERE IS NO NEXUS BETWEEN THE INTEREST RECEIVED ON THE FIXED DE POSITS AND THE INTERESTS PAID BY THE ASSESSEE TO ITS CREDITORS. 3. THE ASSESSEE COMPANY WAS IN EXISTENCE FOR OVER 1 7 YEARS. IT EARNED INCOME IN THE FORM OF INTEREST AND DIVIDEND FOR THE PERIOD UP TO 31.03.2004. UNDER A SCHEME OF ARRANGEMENT APPROVED BY THE HON'BLE HIGH COURT OF KARNATAKA THE ASSESSEE HAS BEEN UTIL IZED AS A SPECIAL PURPOSE VEHICLE (SPV) FOR RESTRUCTURING M/S. KIRLOS KAR ELECTRIC CO. LTD. THE SURPLUS NON-MANUFACTURING AND LIQUID ASSE TS INCLUDING REAL ESTATES AT BANGALORE AND PUNE ALONG WITH CERTAIN LI ABILITIES HAVE ACCORDINGLY BEEN TRANSFERRED TO THE ASSESSEE AS THE SPV. 4. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL IN THE COURSE OF CARRYING ON THE SPECIFIC T ASKS ASSIGNED TO THE ASSESSEE COMPANY AS A SPV THE ASSESSEE RECEIVED CE RTAIN FUNDS ON DISPOSAL OF SOME ASSETS WHICH WERE DEPOSITED IN BAN K ON WHICH INTEREST INCOME WAS EARNED. THE ASSESSEE ALSO HAD TO PAY INTEREST TO THE CREDITORS WHOSE LIABILITY WERE TAKEN OVER BY TH E ASSESSEE. THE ASSESSEE COMPANY SET OFF THE INTEREST RECEIVED ON F IXED DEPOSITS ITA.36/BANG/2010 P AGE - 3 AGAINST THE INTEREST PAYABLE TO ITS CREDITORS. BUT THE ASSESSING OFFICER HELD THAT THE PAYMENT OF INTEREST TO THE CREDITORS BY VIRTUE OF TAKING OVER THE LIABILITY IS A CAPITAL PAYMENT AND THEREFO RE THE BANK INTEREST CANNOT BE SET OFF AGAINST SUCH PAYMENT OF INTEREST TO THE CREDITORS. THE ASSESSING OFFICER HELD THAT THE BANK INTEREST NEEDS TO BE ASSESSED AS INCOME FROM OTHER SOURCES. 5. IN FIRST APPEAL THE COMMISSIONER OF INCOME-TAX(A ) HELD THAT THERE IS A NEXUS BETWEEN THE FIXED DEPOSIT INTEREST EARNED BY THE ASSESSEE AND THE INTEREST PAID TO ITS CREDITORS AND THEREFORE THE SET OFF MADE BY THE ASSESSEE IS JUSTIFIED. ACCORDINGLY HE DELETED THE ASSESSMENT OF INTEREST INCOME UNDER THE HEAD 'INCOM E FROM OTHER SOURCES'. 6. WE CONSIDERED THE MATTER. EVEN IN THE PAST THE ASSESSEE WAS NOT CARRYING ON ANY BUSINESS AS SUCH. ITS BUSINESS WAS MAINLY EARNING INCOME FROM INTEREST AND DIVIDENDS. ONCE THE ASSES SEE COMPANY WAS TREATED AS AN SPV THE ASSESSEE IS SUPPOSED TO APPR OPRIATE THE SALE PROCEEDS OF ASSETS TOWARDS PAYMENT OF OUTSTANDING L IABILITIES. IN THE COURSE OF THESE ACTIVITIES IT IS NOT POSSIBLE TO T AKE A VIEW THAT THE ASSESSEE COMPANY WAS CARRYING ON ANY BUSINESS ACTIV ITIES. THEREFORE IT IS NOT POSSIBLE AGAIN TO SAY THAT THE ASSESSEE R ECEIVED THE BANK ITA.36/BANG/2010 P AGE - 4 INTEREST AS PART OF ITS BUSINESS ACTIVITIES. BOTH THESE TRANSACTIONS COULD NOT BE HELD TO BE CARRIED ON BY THE ASSESSEE COMPAN Y IN THE COURSE OF ITS BUSINESS. THEREFORE THERE CANNOT BE A NEXUS A S CONSTRUED BY THE COMMISSIONER OF INCOME-TAX(A) BETWEEN THE BANK INTE REST RECEIVED AND INTEREST PAID TO ITS CREDITORS. THE RECEIPT OF BANK INTEREST IS UNDER AN EXTREMELY DIFFERENT HEAD WHEREAS THE PAYMENT OF INTEREST TO THE CREDITORS IS AGAIN UNDER AN EXTREMELY DIFFERENT HEA D. THERE IS NO NEXUS BETWEEN THEM. THEREFORE THE ASSESSING OFFIC ER IS JUSTIFIED IN TREATING THE INTEREST ON FDS EARNED BY THE ASSESSEE AS INCOME LIABLE FOR TAXATION UNDER THE HEAD 'INCOME FROM OTHER SOURCES' . 7. THE ORDER OF THE COMMISSIONER OF INCOME-TAX(A) O N THIS POINT IS VACATED AND THE GROUND RAISED BY THE REVENUE IS ALLOWED. 8. THE NEXT POINT OF DISPUTE RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(A) HAS ERRED IN ALLOWING THE CLAIM OF THE ASSESSEE THAT IF THE COST OF THE ASSETS SOLD AND DU LY INDEXED IS REDUCED FROM THE BOOK PROFITS THEN THE BOOK PROFITS WILL B E NEGATIVE AND THERE WOULD BE NO APPLICATION OF SECTION 115JB. THE ASSE SSEE HAS CREDITED THE PROFITS IN ITS BOOKS OF ACCOUNT AS PART OF ITS PROFIT AND LOSS ACCOUNT. THEREFORE THE PROFITS BY WAY OF SURPLUS ON SALE OF ASSETS HAVE FORMED PART OF THE BOOK PROFIT OF THE ASSESSEE COMPANY. A NY ADJUSTMENT TO ITA.36/BANG/2010 P AGE - 5 EXCLUDE SUCH SURPLUS FROM THE BOOK PROFIT WOULD BE PERMISSIBLE ONLY IF THE SAID ADJUSTMENT COMES UNDER THE ITEMS SPECIF IED IN PART- TWO OF THE EXPLANATION 1 TO THE SECOND PROVISO TO SECTION 115JB. THE ITEM AGITATED IN THE PRESENT CASE DOES NOT FALL UNDER TH E ABOVE SPECIFIED LIST. THEREFORE THE COMMISSIONER OF INCOME-TAX(A) IS NOT JUSTIFIED IN HOLDING THE VIEW THAT THE COST OF THE ASSETS DULY I NDEXED MAY BE REDUCED FROM THE BOOK PROFITS. THIS DIRECTION IS A LSO REVERSED. THE GROUND RAISED BY THE REVENUE IS ALLOWED. 9. IN RESULT THE APPEAL FILED BY THE REVENUE IS AL LOWED. ORDER PRONOUNCED ON TUESDAY THE 08TH DAY OF FEBRUA RY 2011 AT BANGALORE. SD/- SD/- (SMT. P. MADHAVI DEVI) (DR. O. K. NARAYANAN) JUDICIAL MEMBER VICE PRESIDENT