2007 (3) TMI 407 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee is engaged in the business of holding investments.
2. Whether professional fees incurred by the assessee are allowable as business expenditure.

Summary:

Issue 1: Business of Holding Investments
The Revenue contended that the assessee, holding units by way of investment, cannot be said to be in business. The Assessing Officer (AO) noted that the assessee showed Rs. 16,95,257 as Short Term Capital Gain (STCG) from the sale of units of J.M. Mutual Fund and claimed business expenditure on professional charges, audit fees, and bank charges as business loss set off against STCG. The AO argued that the assessee did not carry out any business activity during the year and that the activities could not be categorized as business activities, thus disallowing the expenses u/s 37 and u/s 48 of the Income-tax Act, 1961.

The CIT(A) accepted the assessee's contention that it was engaged in the business of investments, relying on clause 85 of the Memorandum of Association and various legal precedents. The CIT(A) directed the AO to allow professional fees as business expenditure, recognizing the acquisition of shares, stocks, bonds, etc., as a business of an investment company.

Issue 2: Allowability of Professional Fees as Business Expenditure
The Revenue argued that since the income earned by the assessee was taxable under the head 'Capital gains', section 28 was not applicable, and thus, other sections under 'Profits and gains of business or profession' were also not applicable. The assessee contended that the AO had accepted business losses, implying acceptance of the business activity, and that professional fees should be allowable as business expenditure irrespective of the taxability of income under specific heads.

The Tribunal held that the scheme of the Act requires incomes of various natures to be computed under specific heads according to their commercial nature. Since the income in question was assessable under 'Capital gains' or 'Income from other sources', deductions u/s 30 to 43D could not be allowed. The Tribunal concluded that professional charges paid by the assessee were not allowable as business expenditure as they were incurred in connection with the deployment of funds resulting in income chargeable under 'Capital gains'.

Conclusion:
The Tribunal reversed the finding of the CIT(A), holding that the assessee is not eligible for deduction of professional fees under 'Profit and gain of business or profession' and consequently, not eligible for set off of the same as business loss against short-term capital gain. The Revenue's appeal was allowed.