Bombay High Court: In the present case, an appeal was filed by the assessee challenging the order of Income Tax Appellate Tribunal (‘ITAT’) which stated that the interest paid by the assessee to the bank for the funds borrowed, could not be set off against interest received by it, by lending part of the said borrowed funds to its sister concerns. The Division Bench of Alok Aradhe, CJ. and Sandeep V. Marne*, J., held that the ITAT could not be permitted to treat the income earned for the Assessment Year 1992-93 as “other sources” while treating the similar income in the succeeding Assessment Year 1993-94 under the head “business”. The Court opined that the order for Assessment Year 1992-93 needed to be brought in tune with its orders passed for subsequent years, which had attained finality, else it would defeat the ends of justice. Thus, the Court set aside the order of ITAT. The Court
Background
The assessee, was incorporated on 17-2-1992 as a private limited company with the objective of constructing business centres, buildings, houses, premises, etc. and to let on lease the same, in addition to the business of financing. The assessee had filed return of income declaring income of Rs. 5966 under the head “business” for the Assessment Year 1992-93. The return was accompanied with the profit and loss account which showed interest receipt of Rs. 14,66,825, against which deduction of interest of Rs. 13,37,225 on fixed loan was claimed.
The assessee had borrowed money on interest from Citibank during the period from 18-2-1992 to 21-3-1992. A part of loan secured from Citibank was utilised by the assessee for lending advances to its sister concerns. The assessee had therefore set off the interest expenditure on amount borrowed from Citibank against the interest income from funds lend to sister concerns.
The Assessment Officer observed that the assessee had secured loan of Rs. 9,20,08,846 from Citibank against equitable mortgage by deposit of title deeds of immovable properties belonging to companies under the same management and guaranteed by the Directors of the assessee company. Out of the said loan, money was incurred for capital advances and pre-operative expenses and the balance amount was advanced to various companies under the same management at varying interest rates. The assessee had shown the interest received from its sister companies of Rs. 14,66,825 in its profit and loss account and claimed expenditure of Rs. 13,37,225 paid to Citibank towards interest on borrowed amount.
The Assessing Officer held that the Assessee was not entitled to set off interest receipt against interest expenditure as interest receipt was assessable under head “other sources” without any deduction. It was further held that business of the assessee had not commenced during the previous year since no rent had been received from Citibank, with whom Assessee had entered into agreement during the year for leasing out the business centres by name ‘Telecom Centre”. The Assessing Officer therefore proceeded to bring to tax the interest receipt as income of the Assessee from “other sources” without allowing any deductions.
Hence, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) (‘CIT(A)’) against the order of the Assessing Officer. The CIT(A) allowed the said appeal holding that since the assessee was in the process of converting the premises into modern business centre, it could not be said that the business had not yet commenced. The CIT(A) further held that arrangement of appointing financier and its temporary utilisation was one composite transaction and therefore the interest received by the assessee on account of temporary utilisation of loan could not be considered in isolation. Thus, the interest payable by the assessee ought to have been adjusted against the interest received by it and only balance could be capitalized.
The Revenue department challenged the judgment of CIT(A) before ITAT, which allowed the appeal of the department and reversed the decision of CIT(A), and restored the order passed by the Assessing Officer. Aggrieved by the order of ITAT, the assessee filed the instant appeal.
(i) Analysis, Law and Decision
The Court observed that according to ITAT, the actual commencement of the business happened after setting up of the necessary infrastructure and equipment, but it ignored the financial transactions which occurred during the period for commencement of the business. Thus, the Court opined that ITAT erred in applying the meaning ascribed to the term “set-up” under the Wealth Tax Act, 1957 for deciding the issue arising out of the Income Tax Act, 1961 (‘Act’). The Court further explained that for taxation under the Wealth Tax Act, 1957 the industry needs to be fully established, whereas the business of letting out premises on hire involves multiple stages, beginning from acquisition of property, repairing/furnishing the same and then letting it out to tenants. The business for the Act would commence right from the stage of repairing and furnishing of property for being rented out and could not be treated as commenced only when the premises were actually let out to tenants.
The Court noted that in subsequent Assessment Year 1993-94 also, the assessee continued the activity of lending monies to sister concerns and others. Furthermore, it was pointed out that the ITAT did not take into consideration various clauses of Memorandum of Association (‘MOA’) under which financing/money lending business was also included as one of the objects behind setting up of the company but the clauses of MOA have been taken into consideration and appreciated by the ITAT in the subsequent Assessment Year. Thus, the activities of lending monies to sister concerns was not treated as business activity of the assessee for Assessment Year 1992-93 whereas the very same activity was treated as business activity in respect of subsequent years. Hence, the Court opined that lending monies to sister concerns was wrongly held by ITAT as not the business activity of the assessee for the said Assessment Year.
The assessee also contended that unless expenditure was incurred for the purpose of earning income, deduction under Section 57(iii) was impermissible on which the Court opined that ITAT could not treat the income earned for the Assessment Year 1992-93 as “other sources” while treating the similar income in the succeeding Assessment Year 1993-94 under the head “business”. Since both CIT(A) as well as ITAT had allowed deduction of expenses incurred towards interest paid by Citibank against income earned from loan advances to sister concerns, it would therefore be necessary to bring the interest incomes in respect of all years under the same head of “business”.
Accordingly, the Court restored the order passed by the CIT(A) and held that order passed by ITAT was indefensible and liable to be set aside. The Court held that it would defeat the ends of justice if one view was taken upon perusal of material on record qua a particular year and record a diagonally opposite finding after perusing the same material in the subsequent year. Therefore, order for Assessment Year 1992-93 was brought in tune with its orders passed for subsequent years, which have attained finality.
[Modi Business Centre Pvt. Ltd v. CIT, 2025 SCC OnLine Bom 2968, decided on: 21-8-2025]
*Judgement authored by- Justice Sandeep V. Marne
Advocates who appeared in this case:
Advocate for the Appellant- Bharat Raichandani, Bhagrai Sahu i/b. UBR Legal, Advocates
Advocate for the Respondent- Arjun Gupta
