Recently, there are some advance rulings issued under GST whereby an opinion was formed that Interest income of pure personal nature is ‘supply’ under GST. The AAR Gujarat in case of Shree Sawai Manoharlal Rathi [Advance Ruling No. GUJ/GAAR/R/2020/10, Dated: 19th May, 2020] has held that Interest received from PPF, Interest received from Personal loans and advances to family members and Interest Income from Saving Bank account would be considered for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for registration under the GST Law. This ruling has again created a confusion, chaos & debate.

Facts of the case

In the above case, applicant was an individual having not engaged in any business. His income includes, (i) Rent receipts: ₹ 9,84,000/-, (ii) Bank interest: ₹ 3,000/-, (iii) Interest on PPF deposit: ₹ 2,76,000/- and (iv) Interest on Personal Loans and Advances: ₹ 7,49,000/-. Thus the aggregate total income was estimated to ₹ 20,12,000/-. So a question was raised whether the said income of interest would form part of aggregate income for calculating threshold limit of ₹ 20.00 Lakh for registration under GST law?

Provisions of Law

Section 2(6) of the Central Goods & Services Tax Act, 2017 defines the term “aggregate turnover” as under:-

“aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.”

“Exempt supply” is defined under Section 2(47) of the CGST Act, 2017 as –

“Exempt Supply” means supply of any goods or services or both which attracts nil rated of tax or which may be wholly exempt under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes Non-Taxable supply.

“Nil rated supply” is nowhere defined in GST Law.

The basic difference between nil rated and exempt supply is that the tariff is higher than 0% in case of exempt supply. But there is no tax payable due to exemption notification. Whereas in case of NIL rated supply, the tariff is at NIL rate so there is no tax without the exemption notification.

Section 7 of the Central GST Act, 2017 prescribes scope of the term “Supply” which includes sale, transfer, exchange, barter, license, rental, lease and disposal. If a person undertakes either of these transactions during the course or furtherance of business for consideration, it will be covered under the meaning of Supply under GST.

Entry 27(a) of the Notification No. 12/2017- Central Tax (Rate) and Entry 28(a) of the Notification No. 9/2017 – Integrated Tax (Rate) dated: 28.06.2017 relates to the exemption of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest. Therefore, such services are exempted from payment of GST and the individual is not required to discharge GST on the activity of providing services by way of extending deposits, loans or advances where the consideration is represented by way of interest.

Submission of Applicant

The applicant submitted that the “Scope of Supply” given under Section 7 of the CGST Act, 2017 clearly states that the receipts should be “In the course or furtherance of Business”. The receipts from personal loans and advances, deposits and Bank Interest are not covered under “Business” as per the definition of “Business” given under Section 2(17) of the CGST Act, 2017. So in view of the same, the applicant was of the opinion that for the purpose of calculating the threshold limit of ₹ 20.00 Lakh for obtaining registration under GST law, such interest receipts are not required to be aggregated.

Finding and decision of AAR

Going by the definition of “aggregate turnover”, the Applicant is required to consider the value of both the taxable supply i.e. “Renting of immovable property” and exempted supply of service provided by way of extending deposits, loans or advances for which they earned interest income, to arrive at “Aggregate Turnover” to determine the threshold limit for the purpose of obtaining registration under the GST Act. The aggregate receipts of the applicant in the instant case are ₹ 20.12 Lakhs i.e. exceeding the threshold for registration. So he will liable to pay GST on the taxable turnover of rental income of ₹ 9.84 Lakhs and balance amount of interest income ₹ 10.28 Lakhs will be considered as exempt income not liable to GST.

Author’s View

The above decision of the AAR in view of author appears to be incorrect and needs to be reviewed. Though it will applicable only to the party who sought it but still author feels that somewhere it is demonstrating opinion of revenue authorities to such transactions. If this ruling is presumed to be correct then it will have far reaching impact on various individuals and HUFs who are not engaged in any business rather earning only interest and rental income. Most of the retired persons and senior citizens will be badly affected by such mindset of revenue authorities and need to run for GST registration and compliances. The issues with this ruling are:

  1. Object of earning Interest Income not examined

PPF Interest

The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the National Savings Institute of the Ministry of Finance in 1968. The aim of the scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits. So it is clear that the earning of interest from PPF can never be in the course or furtherance of business.

Saving Bank Account Interest

The primary objective of opening any Saving Bank account with Bank is to promote habit of saving. There are two types of saving bank accounts are in vogue in our Country viz: Basic Saving Bank deposit Account and Normal Saving Bank Account. Both the accounts are meant for saving and earning interest income thereon. However, based on the transactions limits etc. certain restrictions and charges are levied by Bank in each such account. These saving accounts are regulated by the RBI under the Banking Regulation Act, 1949. On the contrary current bank account is opened to run business etc. Thus the objects of opening a saving Bank account are also clear and it is not for running or supporting business.

Interest on Personal Loans

Further interest income from Personal Loans and Advanced to family/friends (irrespective of related party or not) can also never be called as ‘money lending’ or in the course of such business. It would be worthwhile to refer that for doing money lending business etc. one needs a specific license or approval or permission from RBI or other regulator. But in the instant advance ruling there is nothing on record to prove the same. Also, the applicant was not accepting loan from third parties at a lesser rate and then granting loans to friends & relatives at a higher rate to do any business. So in absence of any such activities how can one imagine that it is in the course or furtherance of business?

  1. Incorrect application /interpretation of legal provisions

The major problem in this ruling appears to the author is that it has failed to take into consideration the full facts of the case and the provisions of the u/s 7 of the CGST Act, 2017. In the instant case earning of interest income is considered as ‘Service’ by the Ld. Authority and relying on the exemption notification they arrived at a conclusion that interest would form part of ‘aggregate turnover’ being exempted service. But they never attempted to appraise the fact that any income included in aggregate turnover need to be amounts to Supply first in terms of Section 7(1)(a) of CGST Act, 2017. Also, the applicant was never into any business. So without any business or in furtherance of business how can there be a supply u/s 7?

If we read section 7 then it comes to light that scope of Supply is very vast and any transaction to be called as ‘Supply’ must satisfy the test laid down under said section. Further section 7(1) (a) states that supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. So it implies that the supply must be done for consideration and supply has to be in the course or furtherance of business. So these twin conditions must be satisfied for any transaction to be called as ‘supply’. Further wherever the legislature intended to treat a transaction as ‘Supply’ without satisfying the conditions of ‘consideration’ & ‘furtherance of business’ the law has been drafted accordingly. Reference can be made to section 7(1) (b), section 7(1) (c), Sch-I & II to the said section. But in the instant case though the applicant is rendering services by way of extending deposits, loans or advances where the consideration is represented by way of interest. But the same was purely personal in nature and without in the course or furtherance of any business. So the basic test laid down u/s 7 is not satisfied and thus taxable event never occurred. Further exemption notification is applicable only to such transactions which are otherwise taxable Supply under section 7 of the Act. So exemption notification cannot exempt a transaction which per se is not a supply. Though Govt. has got powers u/s 7 to notify any transactions as ‘Goods’, ‘Services’ or ‘neither goods nor services’. Thus above notifications in view of author are referring only such services which are in the course or furtherance of business of extending deposits, loans or advances but however to provide relief, it was exempted from tax. But unfortunately the authority has merely relied upon such exemption notifications without considering the undisputed fact that applicant were never into any business.

  1. Burden of Proof on revenue to prove receipts are in course of Business

It is settled law that when one forms an opinion on a particular subject matter then the burden of proof establishing the same lies on him only. In the instant case the AAR presumed that the Interest Income is in the course or furtherance of business then the burden lies on them only to prove the same. The tax payer has got a very strong ground to prove that the same are not so but this is not the case with revenue. So the author feels that at higher forum the question of burden of proof shall also arise and AAR has to establish the same.

  1. Income Tax Provisions & Reporting in ITR not examined

Section 28(i) and section 56 of the Income Tax Act has got two separate and independent provisions for taxation of Interest Income as Income from Business & profession and Income from other sources respectively. It is worthwhile to discuss some of the key pronouncements under the Income Tax law to examine the nature of interest income earned by an assessee.

Interest earned on short-term investment of funds borrowed for setting-up of factory during construction of factory before commencement of business has to be assessed as income from other sources. [Tuticorin Alkali Chemicals & Fertilizers Ltd. v. Commissioner of Income-tax [1997] 93 Taxman 502 (SC)]

Interest Income on Bank deposits out of surplus funds earned by the assessee engaged in the manufacture and export of garments is not to be considered as ‘Business Income’ rather ‘Income from other sources’ only and consequently, deductions under sections 80HHC and 80-IA claimed were also disallowed thereon. [Royal Stitches (P.) Ltd. v. Chief Commissioner of Income-tax, Chennai-II [2009] 184 Taxman 27 (Madras)]

Assessee made term deposit for purpose of availing of credit facility, deposit so made by assessee would be deemed to be a deposit made for purpose of business and eligible for deduction under section 80HHC. It was found that condition, as found in bank’s letter, made it absolutely necessary for assessee to make a term deposit for purpose of availing of credit facility. So it was very much connected and necessary for the business. Hence deduction u/s 80HHC rightly claimed. [Premier Enterprises v. Deputy Commissioner of Income-tax [2015] 59 137 (Madras)]

The main object of assessee-golf club was to provide golf facilities to its members for promotion of sport and there was no element of assessee club being in nature of trade, commerce or business, then interest earned from banks or financial institutions on investment of surplus funds was exempted from tax. [Commissioner of Income Tax (Exemptions) v. Bombay Presidency Gold Club Ltd [2019] 106 58 (Bombay)]

Assessee engaged in business of sale and purchase of mutual funds and money lending business. It earned interest income from parties and after adjusting brought forward business losses there against, declared nil income. The assessing Officer held that interest income was assessable under head of ‘Income from other sources’ and, therefore, brought forward business loss could not be allowed to be adjusted from said ‘interest income’. The Hon’ble Court confirmed the views of Tribunal and CIT (A) which treated interest income from money lending business as business income and allowed benefit of set-off of brought forward business.[Commissioner of Income-tax-I, Ludhiana v. Eastman Industries, Ludhiana [2010] 8 215 (Punjab & Haryana)]

In case of Commissioner of Income-tax v. Bongaigaon Refinery & Petrochemical Ltd. [2001] 114 TAXMAN 311 (GAU.) the Hon’ble Gauhati High Court following the Apex Court ruling in case of Tuticorin Alkali held that items of income from interest and house property, derived by assessee during formation period of main business, would be taxable as income from other sources.

A perusal of the above rulings makes it clear that for the purpose of taxation of Interest Income under the head ‘Business & Profession’ it has to be seen whether such interest earned was in the or during the course of doing business. If it is so then the same is very much a business income else it should be Income from other sources. It is not necessary that each and every interest earned by an assessee engaged in business is a business income. It depends on facts and circumstances of each case. As a corollary, to be taxable under the head ‘Income from other sources’ it is not necessary that assessee should not be engaged in business. Hence the purpose and object of investment are important consideration for the same.

Apart from above legal provisions one can draw an inference from the Income Tax Return (ITR) where an assessee is reporting interest income as ‘Business income’ or ‘Income from other sources’. Generally, people invest money in PPF and deposit in saving bank account out of some savings etc. and interest from which is reported as income from other sources only. So on this footing also if the views of the authority are accepted then it will be a situation where same transaction will be classified differently under Income tax law and differently under the GST law which in the opinion of author will again create a mess.

  1. Conclusion

The author feels that the above ruling is certainly a perverse one. If we read the inclusive definition of business u/s 2(17), it covers all the activities as business irrespective of volume, frequency, recurrence etc. But still Investment activities out of one’s saving for earning interest would never fall under this definition. Nor it will be in the furtherance of business. So this ruling will face judicial scrutiny and the applicant has a good case to win. The author came across one more AAR of Karnataka in case of M/s Anil Kumar Agarwal [AAR no: KAR ADRG30/2020 dated: 04.05.2020] wherein the similar views were expressed without examining whether such services are in the course or furtherance of business. So let’s wait for suitable clarification from Govt. and hope at last good sense will prevail.

Disclaimer: The above expressed views are purely the personal views of the author. The possibility of other views on the subject matter cannot be ruled out. So the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The author is not responsible in anyway.

The author is a practicing Chartered Accountant at Guwahati and can be reached at: [email protected]

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