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 appeal arising from the orders of the Income Tax Appellate Tribunal, Cochin Bench. The first question is whether interest received from deposits held with banks is income from business or from other sources. The second question relates to the proportionate disallowance of interest paid on funds borrowed for investments in immovable properties, shares etc. 2. We have heard the Senior Counsel appearing for the Revenue and Adv.Mr.P.Balakrishnan, counsel appearing for the respondent. After hearing both sides and after going through the orders of the lower authorities, we find that the assessee has put up a new case before the Tribunal that under the R.B.I. directions the assessee, a non-banking financial company has to maintain bank deposits towards security. It is based on this argument that the assessee got favourable orders from the Tribunal. However, neither before the ITA 296/2010 2 Assessing Officer nor before the CIT(Appeals), the assessee has not stated the relevant directions of R.B.I. which requires maintenance of huge deposits with the bank which has earned an interest of over Rs.54.42 lakhs. In fact, the total income of the assessee works out only little over Rs.12.23 lakhs. If the R.B.I. requires a non-banking financial company to maintain deposits with the bank, probably it may be a business activity. In that event, interests therefrom could be treated as business income. However, the assessee has not put up such a case before the Assessing Officer when he proposed to assess interest on deposits as income from other sources. Therefore, we feel that the matter requires to be considered by the CIT(Appeals) with specific reference to the requirement of the assessee to maintain deposits with banks, probably as non-banking financial company as per the direction issued by the R.B.I. in this regard, it is also to be seen whether the assessee's business is really lending money because going by the nature of the investments revealed from the assessment order, it appears, the assessee is engaged in investments in shares and real estates. Therefore, we feel, a detailed ITA 296/2010 3 consideration is required with regard to the business activities while considering the question whether interest received from deposits held with banks is income earned from business activity or whether it is income from other sources. 3. The next issue relates to disallowance of interest for the funds diverted for investments in shares and immovable properties. It is not known whether the assess earned any income in trading of shares or in the purchase and sale of real estate. If the assessee is engaged in long term investments which is revealed from the assessee's statement before the Assessing Officer, then interests on funds diverted for capital investments cannot be allowed as a deduction. It has to be reckoned only in computation of capital gains. Further, even if investments in shares yield dividends which being non-taxable interest on borrowed funds diverted for acquisition of such shares will not be eligible for deduction under Section 14A of the Act. We are of the view that neither the CIT(Appeals) nor the Tribunal have considered this issue properly. Learned Senior Counsel for the Revenue has relied on the decision rendered 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 has considered the scope for disallowance of interest attributable to funds utilised for other purposes. In support of the Revenue's contention that interest on deposits is to be assessed as income from other sources, the learned senior counsel also relied on the decisions in Commissioner of Income 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 by setting aside the order of the Tribunal and that of the first appellate authority and remand the matter to the CIT(Appeals) for consideration of both the issues after giving an opportunity to the assessee and after discussion with the Assessing Officer. C.N.RAMACHANDRAN NAIR, JUDGE. K.SURENDRA MOHAN, JUDGE. srd ITA 296/2010 5 ITA 296/2010 6