TMI Blog2017 (3) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be taxed as income from business and not income from other sources. It would be necessary to note that the assessee had advanced a sum of ₹ 2,00,000/to Shri Ramprasad in the year 1975 on a pronote with interest of 12% per annum. Ramprasad paid the interest to the assessee only till 31.03.1978 and thereafter did not pay a single pie towards interest or principal. As nothing could be recovered from the party, the loan was ultimately written off in the year 1984 by the assessee. The assessee claimed that since no real income was earned by the assessee, nothing could be assessed in respect of the same. In the aforesaid set of facts, we find that the Income Tax Appellate Tribunal was not justified in adding accrued interest on the loan advanced to Shri Ramprasad, which was ultimately written off in the year 1984. An addition in respect of the accrued income of the nonperforming asset could not have been made. The income of the assessee was assessable under the head 'business' and not income from 'other sources'. Having answered the aforesaid question in favour of the assessee, we hold that in the circumstances of the case, there was no justification in law for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mines in the year 1973, the assessee decided to venture into another business. The assessee, therefore, amended its Memorandum and Articles of Association to cover the business of banking and money lending. This was done by the assessee Company by passing a special resolution on 08.06.1973. In furtherance of the said object, as per the amended Memorandum and Articles of Association, the assessee advanced loan to about eight reputed companies between 1973 to 1975. The loan was advanced on execution of pronotes and by mortgage of immovable property. On 09.02.1978, the Reserve Bank of India informed the assessee that it was permitted to continue its branch establishment in India only up to 30.06.1978 and that was only for the purpose of winding up of the affairs of the assesseeCompany and the settlement of its pending matters. The Reserve Bank of India permitted the assessee to confine its activities to the realization of its assets and the permission for retention was extended from year to year up to the relevant years, i.e. 198485, 1988-89, 1989-90, 1990-91, 1991-92 and 1992-93 with which we are concerned. The last installment of recovery from one of the debtors, i.e. Ritz Hotel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest on the loan to Shri Ramprasad could be assessed during the relevant year even on accrual basis? 3. The question that needs to be decided by us at the outset is the first question that is referred to us and if the same is answered in the affirmative and in favour of the assessee, the second and the third question would necessarily be required to be decided in favour of the assessee. 4. Shri Dewani, the learned counsel for the assessee, submitted that the authorities harped upon the absence of license from the Reserve Bank of India in respect of the business of money lending and financing with the assessee to record a finding that the assessee could not have advanced the loan to the eight parties to whom the advances were said to have been made. It is stated that it could be gathered from the material on record that in the year 1978, the Reserve Bank of India had permitted the assessee to continue its branch establishment till 30.06.1978 for the purpose of winding up of the affairs and there was permission by the Reserve Bank of India to carry on the activities in respect of retention from year to year. It is submitted that it is not disputed that loan was advanced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narayana Row, reported in 1966 (61) ITR 0428 to canvass that the heads of income must be decided not by considering the assessee's income but, by applying the common notions of practical men. It is submitted that the assessee in the case before the Hon'ble Supreme Court was a practicing advocate in the High Court and after he was elevated to the Bench of the Court, some outstanding fees were received by him and in that background, the Hon'ble Supreme Court held that the receipts could not have been brought under the residuary head of income from other sources and should have been considered under the head 'profits and gains of business or vocation'. It is submitted that by applying the said test, it could be deduced that though the loan was advanced by the assessee to the parties in the years that were previous to the relevant assessment years, since the loan was realized by the assessee during the relevant assessment years, the income from the receipts so made and the interest on the same should be considered as business income and not the income from other sources. It is lastly submitted on behalf of the assessee by relying on the judgment of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary for the assessee to prove not only that it had obtained prior permission to carry on business but, also a special license to carry on the banking business. It is submitted that it is observed by the Tribunal that the assessee was maintaining a dormant existence and continued its existence only for the purpose of winding up. It is submitted that the authorities have rightly recorded a finding of fact that the income derived by the assessee is income from other sources and not income from business. The learned counsel relied on the judgment of the Bombay High Court, reported in 1991(57) Taxman 47 (Godavari Sugar Mills Ltd. Versus Commissioner of Income Tax). 8. It appears on a perusal of the order of the Income Tax Appellate Tribunal and on applying the tests laid down by the Hon'ble Supreme Court and the Gujarat High Court in the judgments referred to hereinabove that it would be necessary to answer the reference in favour of the assessee and against the department. We find on a reading of the judgment of the Gujarat High Court in the case of Motilal Hirabhai (Supra) that in that case also, like the assessee in this case, initially, the assessee was running a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to continue with its establishment at Nagpur and also had to incur expenses for the business establishment. The facts involved in the case before the Gujarat High Court and the present case are similar and it would be necessary to hold in the circumstances of the case that the activity of advancing money to about eight parties by the assessee was a sort of an organized activity based on the object mentioned in the Memorandum and Articles of Association of the company and the income that was derived by the assessee was liable to be taxed as income from business and not income from other sources. 9. The observation of the Tribunal that since during the relevant assessment years, the loan was not advanced, the income of the assessee should be considered as income from other sources and not income from business is not well founded. It is held by the Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody (Supra) that the amount received by the assessee therein, who was a practicing lawyer in the High Court, after he was elevated as a Hon'ble Judge to the High Court would represent the outstanding fees and the same was liable to be taxed under the head 'business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Premises (Private) Limited, reported in 1991 (190) ITR 259, relied on by the counsel for the assessee to hold that the interest earned on deposits for short period with banks or given as loans would be receipts arising out of the business activity and, hence, the same would be assessable as business income. While deciding the appeals, the Income Tax Appellate Tribunal did not consider the facts involved in this case in detail and also the law that could have applied to the same before upholding the finding of the Commissioner of Income Tax (Appeals) that the entire expenses incurred by the assessee for maintaining its establishment at Nagpur for the purpose of its business activity could not have been deducted. Though some findings are recorded in paragraphs 11 and 12 of the order of the Tribunal on which reliance is placed by the counsel for the department, we find that the factual aspects involved in the case are not considered in either the said paragraphs or in the other part of the order. It is also conspicuous to note that although the Tribunal had dismissed the appeals of the assessee after holding that the income of the assessee was income from other sources and not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adding accrued interest on the loan advanced to Shri Ramprasad, which was ultimately written off in the year 1984. An addition in respect of the accrued income of the nonperforming asset could not have been made. Since the income could not have been realized by the assessee, the addition was liable to be deleted. 11. Hence, we hereby hold that in the facts and circumstances of the case, the income of the assessee was assessable under the head 'business' and not income from 'other sources'. Having answered the aforesaid question in favour of the assessee, we hold that in the circumstances of the case, there was no justification in law for the disallowance of 20% of the establishment expenses. We further hold that the set off of losses of earlier years could be allowed as deduction during the relevant assessment year. We also hold that in the circumstances of the case, no income from interest on the loan to Shri Ramprasad could be assessed during the relevant assessment year on accrual basis when the loan was written off in the year 1984. Having answered the reference as aforesaid, the reference applications stand disposed of with no order as to cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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