Interest from Staff Loans and Advances is Business Income, Not Income from Other Sources

Issue:

Whether interest income received by an electricity distribution company from staff loans and advances should be classified as “income from other sources” under Section 56 or “business income” under Section 28(i) of the Income-tax Act, 1961.

Facts:

For the assessment year 2011-12, the assessee-company, primarily engaged in the business of electricity distribution, filed a nil return of income. The Assessing Officer (AO) took the view that interest income received from staff loans and advances should be treated as “income from other sources” because it was not generated from the day-to-day business operations of the company. The Tribunal, after considering the matter, remitted it back to the Assessing Officer. It was noted that in the case of a sister concern of the assessee, a similar issue had been decided, where it was held that interest on staff loans and advances constituted “business income.”

Decision:

The court held that in view of the existing judicial decisions, no question of law, much less any substantial question of law, arose from the Tribunal’s order. This implies that the High Court upheld the principle that interest on staff loans and advances for such a business should be treated as business income, siding with the assessee.

Key Takeaways:

Nexus with Business: For income to be classified as “business income,” there must be a direct or incidental nexus with the assessee’s primary business activities. Providing loans and advances to staff is often an integral part of managing human resources and facilitating smooth business operations for a large entity.
“Business Income” vs. “Income from Other Sources”: The distinction is crucial for various deductions, allowances, and set-offs. Income from other sources is a residual head, while business income covers profits and gains from business or profession.
Consistency for Sister Concerns: The fact that a similar issue was decided in favor of a sister concern reinforces the principle of consistency in applying tax law to similar entities within the same group or operating in the same industry.
No Substantial Question of Law: When a legal issue has been consistently settled by judicial pronouncements, particularly by higher courts or Tribunals in similar cases, it ceases to be a “substantial question of law” that warrants further appeal. This means the legal position is considered clear.
Holistic View of Business Activities: Courts often take a holistic view of a company’s activities, recognizing that certain ancillary transactions, like staff welfare or management-related financial activities, are inextricably linked to the main business.

HIGH COURT OF GUJARAT

Principal Commissioner of Income-tax-1

Paschim Gujarat Vij Company Ltd.

BHARGAV D. KARIA and D.N. Ray, JJ.

R/TAX APPEAL NO. 458 of 2024

FEBRUARY 24, 2025

Nikunt K Raval, Adv. for the Appellant. Manish J Shah, Adv. for the Respondent.

ORDER

Bhargav D. Karia, J. – Heard learned advocate Mr.Rudram Trivedi for learned Senior Standing Counsel Mr.Nikunt K. Raval for the appellant and learned advocate Mr.Manish J. Shah for the respondent.

2. This Appeal is filed under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) by the appellant-Revenue arising out of the order dated 19^th September, 2023 passed by the Income Tax Appellate Tribunal in ITA No.324/Ahd/2015 for Assessment Year 2011-12. The questions of law arising in this Appeal are re-framed as under :

(i)

Whether ITAT is justified in setting aside the addition of INR 1,03,66,000/- treating interest income earned from loans to staff and other loans as “Income from other sources” without appreciating the fact that the assessee is in the business of distribution of electricity?

(ii)

Whether ITAT has erred in treating income from interest of INR 79,90,000/-earned from supplier/other parties as business income instead of income from other sources wherein the income was not generated from day to day business of the assessee?

(iii)

Whether ITAT has erred in treating income from miscellaneous receipts of INR 8,83,12,000/- as business income instead of income from other sources without appreciating the fact that the same was not generated from day-to-day business of the assessee?

3.1. Brief facts of the case are that the assessee-Company e-filed its return of income on 29.09.2011 declaring total income at Rs.NIL after claiming set-off of brought forward business loss and unabsorbed depreciation. Further the assessee had paid total tax and interest of Rs.21,70,38,952/- under Section 115JB of the Income Tax Act, 1961 (for short ‘the Act’) showing Book Profit under Section 115JB of Rs.98,06,20,446/-. The return of income of the assessee was processed under Section 143(1) of the Act. The case of the assessee was selected for scrutiny and notice dated 30.08.2012 under Section 143(2) of the Act was issued.

3.2. Thereafter, Assessment Order dated 05.02.2014 was passed under Section 143(3) of the Act for Assessment Year 2011-12 wherein, the Assessing Officer while finalising the assessment for the Assessment Year 2011-12 made addition of interest from staff loan and advances of Rs.1,03,66,000/-, interest on other loans and advances of Rs.79,90,000/- and on account of Miscellaneous income of Rs.8,83,12,000/- as income from other sources instead of income from business or profession as the respondent-assessee was engaged in the business of distribution of electricity and the said income was not generated from day to day business of the assessee-Company.

3.3. Being aggrieved, the assessee preferred an Appeal before the CIT (Appeals) who confirmed the aforesaid additions made by the Assessing Officer on the ground that interest income cannot be said to be arising from the business of the assessee as the assessee is not engaged in business of money lending and held that the Assessing Officer rightly treated the same as income from other sources. Being aggrieved, the assessee preferred an Appeal before the Tribunal.

3.4. The Tribunal followed the decision of the Co-ordinate Bench on the identical issue in case of the sister concern of the assessee-Company namely Gujarat Energy Transmission Corporation (GETCO) in ITA No.2855/Ahd/2015 wherein by order dated 27.07.2022, the issue was sent back to the file of the Assessing Officer in view of the decision of the Hon’ble Orissa High Court in case of the Odisha Power Generation Corporation Limited to decide the issue upon examining the same with regard to the head of income considering relevant evidence in light of the observation made by the Hon’ble Orissa High Court. The Tribunal also followed the decision in case of Madhya Gujarat Vij Company Limited in ITA No.680/Ahd/ 2014 dated 18.08.2023. The Tribunal therefore, sent the matter to the Assessing Officer relying upon the aforesaid decisions.

4. Learned advocate Mr.Rudram Trivedi for the appellant-Revenue submitted that though the issue is no-more res-integra in view of the decision of this Court in Tax Appeal No.63 of 2020, the judgment rendered by this Court in the said Tax Appeal is pending for adjudication before the Apex Court and therefore, the question may be admitted to keep the issue alive.

5. On the other hand learned advocate Mr.Manish Shah for the respondent submitted that the issue is squarely covered by the decision of this Court in case of the The Principal Commissioner of Income Tax, Vadodara-1 Versus Gujarat Urja Vikas Nigam Limited rendered in Tax Appeal No.63 of 2020 which was later on considered by this Court in Special Civil Application No.20400 of 2023 and other allied matters while considering the order passed by the Tribunal rejecting the application for rectification of mistake filed by the petitioner. Learned advocate Mr.Manish Shah therefore submitted that following the decision of this Court, this Appeal is liable to be dismissed.

6. Heard learned advocates for both the sides. In case of Gujarat Urja Vikas Nigam Limited (supra), this Court has held as under :

“13. With regard to question No.2[d], the Assessing Officer noticed that as per Schedule 14, the assessee has shown other income consisting of interest on loan and advances, incentives from CPSU, etc. The Assessing Officer was of the view that this income was to be assessed as income from other sources instead of business income shown by the assessee.

14. On appeal, the CIT(A) as well as the Tribunal held that the interest income is required to be treated as business income instead of income from other sources. The Tribunal in its order observed as under:

“10 We have heard the rival contentions and perused the material on record on this issue. The assessing Officer has treated the aforesaid income under the head income from other sources without controverting the submission of the assessee on the basis of which it was claimed that these income were of the nature of business income as elaborated in para seven of this order. The ld. CIT(A) has decided the issue in favour of the assessees taking that this issue was decided in favour of the assessee for assessment year 2009-10. During the course of appellate proceedings, the Revenue has failed to controvert the aforesaid contention and the findings of the ld. CIT (A), therefore after considering the material fact that interest earned on loan and advances from deposit placed with Mega Power Project toward sits sharing of power and interest of UL pool account received from M/s.Power Grid Corporation India Ltd were directly related to the business of the assessee,therefore, this ground of appeal of the Revenue stands dismissed.”

15. In view of above findings of acts arrived at by the Tribunal that interest earned by the assessee was directly related to the business of the assessee, no question of law much less substantial question of law arises. Therefore, appeal stands dismissed qua question No.2[d].”

7. Considering the above decision, while rendering the oral judgment in Special Civil Application No.20400 of 2023 in case of Uttar Gujarat Vij Co. Ltd v. The Income Tax Officer, Ward 2(1)(4), it was observed as under :

“8. Having heard learned advocates for the parties it appears that it is not in dispute that the petitioner has relied upon the decision of this court in case of Gutarat Urja Vikas Nigam Itd v. DCIT in Tax Appeal No. 63/2020 wherein, the Tax Appeal was preferred by the Revenue on the aspect as to whether interest received on staff loan is business income or not for the purpose of consideration of disallowance under section 14A of the Act. The facts of the case of Gujarat Urja Vikas Nigam Ltd v. DCIT and the facts of the case of the petitioner are identical and not different and as such, the Tribunal could not have relied upon the decision of Orissa High Court while distinguishing the facts of the case of the petitioner by ignoring the decision of the Jurisdictional High Court. More particularly, when the CIT and the Tribunal in case of the Guiarat Urja Vikas Nigam Ltd v. DCIT have held that interest income on staff loans is required to be treated as ‘business income’ instead of ‘income from other sources’ which is confirmed by this court in the aforesaid Tax Appeal.

9. In case of Gujarat Energy Transmission Corporation Ltd supra) in ITA No. 633/2013, the Coordinate Bench of the Tribunal, after considering the decision of this Court, has held that the interest on staff loans and advances are part of the ‘business income’ only. In such circumstances, the decision of the co-ordinate Bench of the Tribunal as well as this court were binding upon the Tribunal resulting into the mistake apparent on record.”

8. In view of the above view taken by this Court, we do not find any merit in this Appeal as no question of law much less any substantial question of law can be said to have arisen in the impugned order passed by the Tribunal so far as the proposed questions of law are concerned. The Appeal therefore, being devoid of any merit is accordingly dismissed.