Kottayam v. Mangalam Publications India (P) Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN MONDAY, THE 21ST FEBRUARY 2011 / 2ND PHALGUNA 1932 ITA.No. 296 of 2010() --------------------- AGAINST THE ORDER DATED 18/03/2010 IN ITA.431/COCH/2007 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX DEPT. RESPONDENT(S): RESPONDENT: -------------------------- M/S.MUTHOOTT BANKERS, MUTHOOTTU TOWERS, M.G.ROAD, KOCHI-35. ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 21/02/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & K.SURENDRA MOHAN, JJ. ---------------------------------------------------- I.T.A.No.296 of 2010 ---------------------------------------------------- Dated this the 21st day of February, 2011 Judgment Ramachandran Nair, J. Two questions are raised for our decision in the appealarising from the orders of the Income Tax Appellate Tribunal,Cochin Bench. The first question is whether interest receivedfrom deposits held with banks is income from business or fromother sources. The second question relates to theproportionate disallowance of interest paid on funds borrowedfor investments in immovable properties, shares etc. 2. We have heard the Senior Counsel appearing for theRevenue and Adv.Mr.P.Balakrishnan, counsel appearing for therespondent. After hearing both sides and after going throughthe orders of the lower authorities, we find that the assesseehas put up a new case before the Tribunal that under theR.B.I. directions the assessee, a non-banking financialcompany has to maintain bank deposits towards security. It isbased on this argument that the assessee got favourableorders from the Tribunal. However, neither before the ITA 296/2010 2 Assessing Officer nor before the CIT(Appeals), the assesseehas not stated the relevant directions of R.B.I. which requiresmaintenance of huge deposits with the bank which has earnedan interest of over Rs.54.42 lakhs.In fact, the total incomeof the assessee works out only little over Rs.12.23 lakhs. If theR.B.I. requires a non-banking financial company to maintaindeposits with the bank, probably it may be a business activity.In that event, interests therefrom could be treated as businessincome. However, the assessee has not put up such a casebefore the Assessing Officer when he proposed to assessinterest on deposits as income from other sources.Therefore, we feel that the matter requires to be consideredby the CIT(Appeals) with specific reference to the requirementof the assessee to maintain deposits with banks, probably asnon-banking financial company as per the direction issued bythe R.B.I. in this regard, it is also to be seen whether theassessee's business is really lending money because going bythe nature of the investments revealed from the assessmentorder, it appears, the assessee is engaged in investments inshares and real estates. Therefore, we feel, a detailed ITA 296/2010 3 consideration is required with regard to the business activitieswhile considering the question whether interest received fromdeposits held with banks is income earned from businessactivity or whether it is income from other sources. ITA 296/2010 3 consideration is required with regard to the business activitieswhile considering the question whether interest received fromdeposits held with banks is income earned from businessactivity or whether it is income from other sources. 3. The next issue relates to disallowance of interest forthe funds diverted for investments in shares and immovableproperties. It is not known whether the assess earned anyincome in trading of shares or in the purchase and sale of realestate. If the assessee is engaged in long term investmentswhich is revealed from the assessee's statement before theAssessing Officer, then interests on funds diverted for capitalinvestments cannot be allowed as a deduction. It has to bereckoned only in computation of capital gains. Further, even ifinvestments in shares yield dividends which being non-taxableinterest on borrowed funds diverted for acquisition of suchshares will not be eligible for deduction under Section 14A ofthe Act. We are of the view that neither the CIT(Appeals) northe Tribunal have considered this issue properly. LearnedSenior Counsel for the Revenue has relied on the decisionrendered by this court in Commissioner of Income Tax, ITA 296/2010 4 Kottayam v. Mangalam Publications India (P) Ltd. ( [2010] 190 Taxman 38 (KER.) ) wherein this court hasconsidered the scope for disallowance of interest attributableto funds utilised for other purposes. In support of theRevenue's contention that interest on deposits is to beassessed as income from other sources, the learned seniorcounsel also relied on the decisions in Commissioner ofIncome Tax v. Popular Vehicles & Services Ltd.[ (2010)325 I.T.R. 523 (Ker.)) and Pandian Chemicals Ltd. v.Commissioner of Income Tax[ (2003) 262 I.T.R. 278]. 3. In view of the above findings, we allow the appeal bysetting aside the order of the Tribunal and that of the firstappellate authority and remand the matter to the CIT(Appeals)for consideration of both the issues after giving an opportunityto the assessee and after discussion with the Assessing Officer. C.N.RAMACHANDRAN NAIR, JUDGE. srd K.SURENDRA MOHAN, JUDGE. ITA 296/2010 5 ITA 296/2010 6