The Hindu Business Line : The treatment of `other income'

Before its discontinuance, the company had unabsorbed business losses. Since then, the only source of income that the company has is interest from fixed deposits from banks. Against such interest the company claims as a deduction expenses such as office rent, printing and stationery, audit fees, profession tax, and so on. The balance of income is set off against the brought-forward unabsorbed business losses.

The assessing officer (AO) has taken up the return of income of the company for scrutiny for the assessment year 2002-2003.

During the course of the assessment, the AO expressed the view that such interest income is to be assessed as income from other sources and not as business income, and that consequently, the expenditure claimed against such interest income was not an allowable expenditure.

The AO further held that the brought-forward loss from business cannot be set off against such interest income.

Is the assessing officer's view correct? -- S. V. Pradhan

An income, which is direct or ancillary to a business, may be treated as business income.

The term business should be understood as a continuous exercise of an activity and the carrying on of such activity is essential to constitute a business.

In certain cases, however, a single activity may also be treated as a business.

At any rate, it appears that placing deposits with the bank and earning interest therefrom cannot be treated as a business activity.

It, therefore, appears that the AO is right in his view that the interest from such deposits should be taxed only as income under the head `Income from other sources' and not as income under the head `Profits and gains of business or profession'.

Given this view, it will follow as a corollary that no deduction can be claimed in respect of the expenditure, which the questioner has listed out against such income, being interest from bank deposits. What can be claimed as a deduction is only such sums as are incurred in earning the income.

In the instant case it appears that the expenditure listed is not incurred in earning the interest income and, therefore, cannot be claimed as a deduction.

It also follows as a corollary that a brought-forward loss under the head `Profits and gains of business or profession' cannot be set off against the income by way of interest, which will be assessable under the head `Income from other sources'.

It may also be noted that a loss under the head `Profits and gains of business or profession' of any year can only be carried forward and set off against income under the same head within a period of eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Exemption for pensioners

I AM A pensioner having a taxable pension in excess of Rs 50,000 per annum. I have sold a residential flat for Rs 20 lakh and used the proceeds partly for acquiring another flat and the balance I have invested in capital gains bonds of Nabard.

Both the investments I have made before six months from the date of sale of my flat. In the intermittent period I had invested the sale proceeds of Rs 20 lakh in short-term deposits with the bank and earned interest income of about Rs 30,000.

What are the exemptions that I am eligible for? Should the interest income of Rs 30,000 be shown as income under the head `Income from other sources'?

R. A. Krishnan

Reply

The questioner can claim exemption under both Sections 54 and 54EC. Under Section 54 exemption is available on transfer of one residential house and on reinvestment in another residential house.

This exemption is available subject to satisfying the following conditions:

The assessee is an individual or HUF;

The gain arises from the transfer of a residential house being a long-term capital asset; and

The income from such asset is chargeable to tax under the head `income from house property';

The exemption would be available to the following extent:

If the amount invested is more than or equal to the capital gain, the whole of the capital gain;

If the amount invested is less than the capital gain then to the extent invested.

For enjoying this exemption, the new residential house should have been purchased within one year before or two years after the date of transfer, or the construction of the new residential house should have been completed before the expiry of three years from the date of transfer of the capital asset.

The exemption under Section 54EC is available subject to satisfying the following conditions:

The asset transferred is a long-term capital asset;

The investment is in the bonds of Nabard, the National Highway Authority of India, Rural Electrification Corporation, the National Housing Bank or SIDBI;

The bonds are redeemable after a period of three years.

The investment should be made before the expiry of six months from the date of transfer of the capital asset.

The quantum of exemption is to be computed like in the case for Section 54.

The interest income from the bank, by placing short-term deposits out of the sale proceeds, will have to be offered as income under the head `Income from other sources'.

In the instant case, however, deduction under Section 80L in respect of the income can be claimed. The deduction available under this section for the assessment year 2003-2004 in respect of the bank interest would be a maximum of Rs 12,000.

This deduction, it may be noted, will be maximum not only in respect of the bank interest but also with regard to certain other kinds of income such as NSC interest, and so on.

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