By TIOL News Service

NEW DELHI, NOV 01, 2013: THE issues before the Bench are - Whether the business loss in the form of business expenses against NIL business receipt is eligible for set off against income from other sources when interest income earned by the assessee was considered as income from other sources and Whether the AO can force the assessee to change the method of accounting. And the verdict goes against the Revenue.

Facts of the case

The assessee was engaged in the business of real estate development. A search & seizure operations were carried out u/s 132. Therefore, notices u/s 153A were issued .The AO observed that the assessee had started a real estate project and had booked expenses incurred on the project under the head work in progress, during the year nothing was sold. The assessee had earned an interest income of Rs.24,19,085/- partly from the loan given to sister concern and partly from bank deposits and after claiming various expenses the net profit was declared at Rs.2,85,123/-. The AO treated the income of interest as income from other sources and disallowed the amount expenses debited in the P&L Account treating them as not related to earning of interest income, In the A.Y 2008-09 the AO held that by not recognizing the income following the percentage completion method, the assessee was deferring its tax liability. The AO arrived at the conclusion that during the A.Y under consideration 44% of project was complete and assessee had also received of substantial amount as advances. Therefore, on the basis of 44% of completed project, the AO computed the income of the assessee at Rs.5,13,48,000/-. The AO further made an addition of Rs.2,34,594/- as other income as per P&L Account. The CIT(A) partly deleted the additions made by the AO in respect of A.Y 2007-08 and completely deleted the addition in respect of A.Y 2008-09.

On Appeal before the Tribunal the DR submitted that the assessee was in the business of real estate development and investment of surplus funds for earning of interest income cannot be said to be incidental to the business activity. Regarding non allowance of expenses it was submitted that these expenses were not for earning of interest income and rather these were part of capital work in progress. The AR submitted that the assessee was in the business of real estate development and had set up an office for undertaking various activities and certain expenses for running of the said business was incurred which were not related to a particular project and therefore were debited in the P&L Account. It was further submitted that even if interest income earned by the assessee was considered as income from other sources even then the business loss in the form of business expenses against NIL business receipt was eligible for set off against income from other sources.

Having heard the parties, the Tribunal held that,

++ with respect to A.Y 2007-08, we observe that the income was earned out of surplus funds advanced by the assessee to its sister concern which was not a business activity of the assessee and neither the AR could prove that advances were given for business purposes. We are in agreement with the arguments of AR that even if the income is treated under the head income from other sources even then the total income of the assessee would be computed after setting off losses under other sources including under the head profits from business. In our opinion the expenses of rent, electricity, printing, telephone conveyance, security expenses, filing fee etc. are common expenses which are required to run a business. No infirmity in the order of CIT(A);

++ the AO cannot force assessee to change the method of accounting specially in a case where in earlier years the method employed by assessee was accepted by Department and we therefore do not find no infirmity in his order.

(See 2013-TIOL-925-ITAT-DEL)