2018 (2) TMI 741 - AT - Income Tax

Revision u/s 263 - error committed by AO in taxing the interest income in the manner as specified under Rule 8 of IT Rules, 1962 which is causing prejudice to the interest of revenue - Held that - CIT u/s 263 of the Act has not pointed out any defect in the submission filed by assessee before him during proceedings. The assessee before Ld. Pr. CIT has made the submission that amount of interest income is directly linked with the agricultural operation of assessee. Therefore, the same has to be included in the composite income as specified under Rule 8 of IT Rules, 1962. We find force in the advanced argument by the assessee as the impugned interest income is directly linked with the agricultural operation of assessee. See Eveready Industries India Ltd. v. CIT & Anr. reported (2009 (12) TMI 226 - CALCUTTA HIGH COURT) . The income is directly linked with the business operation of assessee. Therefore, same is liable for taxation in the manner specified in Rule 8 of IT Rules, 1962. We uphold the grievance of the assessee and quash the impugned revision order as devoid of jurisdiction.- Decided in favour of assessee.

Issues Involved:

1. Validity of exercising jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Classification of interest income under Rule 8 of Income Tax Rules, 1962.
3. Consideration of interest income as composite income linked with agricultural operations.

Detailed Analysis:

1. Validity of Exercising Jurisdiction under Section 263 of the Income Tax Act, 1961:

The assessee challenged the order of the Principal Commissioner of Income Tax (Pr. CIT) under Section 263, which set aside the assessment order passed under Section 143(3). The Pr. CIT directed the Assessing Officer (AO) to re-do the assessment for the assessment year 2012-13. The primary contention was that the Pr. CIT erred in holding the AO's order as erroneous and prejudicial to the interest of the revenue without providing substantial reasons or considering the submissions made by the assessee.

2. Classification of Interest Income under Rule 8 of Income Tax Rules, 1962:

The assessee, a private limited company engaged in the cultivation and manufacturing of tea, declared interest income of ?3,09,81,406/- and computed tax under Rule 8, treating it as composite income from agricultural operations. The Pr. CIT observed that this interest income had no connection with agricultural operations and thus could not be taxed under Rule 8. The AO's order allowing the interest income under Rule 8 was deemed erroneous by the Pr. CIT.

3. Consideration of Interest Income as Composite Income Linked with Agricultural Operations:

The assessee argued that the interest income was earned on Fixed Deposits (FDs) made from a cash credit account, which was a requirement by the bank to secure higher cash credit limits. The interest income, therefore, was directly linked to the agricultural operations and should be treated as composite income under Rule 8. The assessee also contended that the interest expenses exceeded the interest income, implying no net interest income from other sources. The assessee cited various judicial precedents, including a case decided by the co-ordinate Bench of the Tribunal and the Hon'ble Supreme Court, to support their claim.

Tribunal's Findings:

The Tribunal noted that the Pr. CIT did not consider the detailed submissions made by the assessee, which demonstrated that the interest income was directly linked with the agricultural operations. The Tribunal found merit in the assessee's argument that the interest income should be treated as composite income under Rule 8. The Tribunal referred to the judgments of the Hon'ble jurisdictional High Court in the cases of Eveready Industries India Ltd. and Warren Tea Ltd., which supported the assessee's claim that interest income from short-term deposits made out of business funds should be treated as business income.

The Tribunal concluded that the Pr. CIT's order under Section 263 was devoid of jurisdiction as it failed to point out any defect in the assessee's submissions and did not establish that the AO's order was unsustainable in law. Consequently, the Tribunal quashed the revision order passed by the Pr. CIT and allowed the appeal in favor of the assessee.

Conclusion:

The Tribunal upheld the assessee's appeal, setting aside the Pr. CIT's order under Section 263 and confirming that the interest income should be treated as composite income under Rule 8, directly linked to the agricultural operations of the assessee. The Tribunal emphasized the importance of considering detailed submissions and judicial precedents while exercising jurisdiction under Section 263.

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