2013 (8) TMI 979 - AT - Income Tax

Disallowance of interest - CIT(A) allowed claim - Held that - Merely because of some of the occasion there were credit balance in the current accounts will not disentitle assessee s claim of interest on the fund borrowed for the purpose of business. The rate of interest on the unsecured loan taken from the relatives cannot be compared to the rate of interest on the funds borrowed from banks in so far as borrowings from banks are always secured loan provided after taking collateral and other securities Bank also mortgage the immovable property of assessee against the loan. However loan from friends are relatives are generally unsecured therefore terms and conditions vis- -vis rate of interest on secured loans and unsecured loans are always different. In the immediately preceding year the Assessing Officer has allowed 18% interest on some borrowings while framing assessment u/s 143(3). Accordingly we do not find any infirmity in the order of CIT(A) for deleting the disallowance of interest. Nature of income earned on sale of shares and securities - Held that - There are so many other factors which are required to be considered while deciding the nature of income earned on such shares like volume and frequency of transaction period of holding past track record of assessee etc. . The ld. CIT(A) has deleted the addition by observing that volume of transaction alone cannot lead to presumption that gain would be assessable as business income. The ld. CIT(A) was not justified in ignoring the volume and frequency of transaction while deciding the nature of income earned on sale of shares and securities which were held as investment. In the interest of justice the matter is restored back to the file of A.O. for deciding afresh.

Summary

Issues:
1. Disallowance of depreciation and expenses on tractor.
2. Disallowance of interest expenses.
3. Treatment of short term capital gain on sale of shares as business income.

Issue 1: Disallowance of depreciation and expenses on tractor:
The Appellant, engaged in the business of grains, pulses, and oil seeds, claimed depreciation on a tractor used for business. The Assessing Officer disallowed the claim, stating the business use was not established. The CIT(A) deleted the disallowance, finding the appellant satisfactorily explained the tractor's business use and the claimed expenses were in line with turnover increase. The Tribunal upheld the CIT(A)'s decision, noting the tractor was exclusively used for business, and the expenses were justified by turnover growth. The disallowance was deemed baseless and deleted.

Issue 2: Disallowance of interest expenses:
The Assessing Officer disallowed interest expenses on an unsecured loan, alleging funds were not used for business purposes. However, the CIT(A) overturned the disallowance, highlighting that the Assessing Officer failed to prove consistent parking of borrowed funds in the current account. The CIT(A) reasoned that occasional negative balances in the account were plausible in the business context. Additionally, the interest rate was deemed reasonable based on past assessments and legal precedents. The Tribunal concurred, emphasizing that interest on unsecured loans for business should not be compared to secured loans' rates. The disallowance was deleted as the interest was justified for business purposes.

Issue 3: Treatment of short term capital gain on sale of shares:
The Assessing Officer treated the appellant's short term capital gain on shares as business income due to transaction volume. However, the CIT(A) reversed this decision, considering the shares as investments, not stock in trade. The intention and accounting treatment supported the capital gain classification. Nonetheless, the Tribunal disagreed with the CIT(A), emphasizing that other factors like transaction frequency and holding period must be assessed. The matter was remanded to the Assessing Officer for a fresh decision based on all relevant factors, restoring the appeal in part.

In conclusion, the Tribunal partially allowed the Revenue's appeal, maintaining the disallowance of depreciation and expenses on the tractor while overturning the disallowance of interest expenses. The treatment of short term capital gain on shares was remanded for further assessment.