2013 (7) TMI 732 - AT - Income Tax

Existence of business activity - Whether assessee is having business activity or not pending cancellation of the license due to the orders of the suspension granted by SEBI in the interim period held that temporary suspension of business can not be taken as closure of business and necessary expenditure was allowed court followed the principle thereon direct the AO to allow loss which is reduction in value of shares held as stock in trade. TDS u/s 194J - Whether the disallowance u/s 40(a)(ia) valid - the issue of disallowing amount being legal fees paid to advocate u/s 40(a)(ia) - the AO and the CIT(A) erred in mixing up the facts - As far as fees there was TDS which was paid belatedly - Even though AO mentioned the same he did not disallow the amount - Only disallowance in the order is of the amount paid to advocate on which provisions of sec. 194J are not applicable as the amount was less than the limit - Provision of section 40(a)(ia) cannot be applied to amount paid to the advocate as there was no need to make TDS on that amount under the provisions - AO to allow the deduction. Cessation of liability - Writing off Income from other sources - treatment of interest income as income from other sources The amount was written back to P/L Account under provisions of sec.41(1) the AO and the CIT(A) treated the same as other income - Even though there is no details filed with reference to amount written back, it was the contention that write back of business liability provided in earlier years was considered as income under section 41(1), which falls under the head business - the amount has to be considered as business income as the amount was written back u/s 41(1) - to that extent the orders of the AO and the CIT(A) was modified. Nature of loss - Treating the business loss as speculation loss by invoking provisions of Explanation-2 to sec.73 - assessee is entitled to claim business loss - income from business. Assessee is entitled set off net business loss if any - Explanation to section 73 does not apply to the facts as there are no purchases and sale of shares during year and loss is of reduction in valuation of closing stock. Expenses claim - expenses claimed by the assessee were not allowed on the ground that the assessee has not carried out any business activity during the year there by not allowing carry forward of loss - Since the expenses were incurred in connection with the business activity to keep business alive, to the extent of business loss determined during the year is to be carried forward for setting off if any in later years decided in favour of assessee.

Summary

Issues Involved:
1. Non-allowance of loss on transactions backed by delivery
2. Disallowance of legal fees under section 40(a)(ia)
3. Treatment of interest income as 'income from other sources'
4. Treating business loss as speculation loss
5. Not allowing expenses claimed by the assessee
6. Charging of interest under section 234B

Issue 1: Non-allowance of loss on transactions backed by delivery:
The assessee appealed against the order of CIT(A) regarding the non-allowance of a loss of Rs.58,420 on transactions backed by delivery, claiming the reduction in the value of shares as a loss in the P&L Account. The ITAT directed the AO to allow the loss, citing precedents where similar losses were allowed in earlier years. The ITAT held that temporary suspension of business does not equate to business closure, allowing the reduction in the value of shares as a loss.

Issue 2: Disallowance of legal fees under section 40(a)(ia):
The AO disallowed an amount of Rs.12,025 as legal fees paid to an advocate under section 40(a)(ia) due to non-payment of TDS in time. The ITAT found an error in the disallowance, noting that TDS was paid belatedly on the amount of Rs.2,39,875, and the disallowance should not apply to the amount paid to the advocate as it was below the threshold for TDS deduction. The ITAT directed the AO to allow the amount of Rs.12,025.

Issue 3: Treatment of interest income as 'income from other sources':
The AO and CIT(A) treated interest income of Rs.31,223 as 'income from other sources' under sec.41(1). The ITAT disagreed with this treatment, stating that the amount written back to the P/L Account under sec.41(1) should be considered as business income, not 'income from other sources'. The ITAT modified the orders of the AO and CIT(A) accordingly.

Issue 4: Treating business loss as speculation loss:
The AO treated the business loss claimed as speculation loss under Explanation-2 to sec.73, not allowing it to be set off against income from other sources. The ITAT allowed this ground, stating that the assessee is entitled to claim business loss and set it off against income. The Explanation to section 73 was deemed inapplicable as the loss was due to a reduction in the valuation of closing stock, not speculation.

Issue 5: Not allowing expenses claimed by the assessee:
The assessee's expenses were disallowed due to the lack of business activity during the year. The ITAT directed the AO to allow the carry forward of business loss incurred to keep the business alive for setting off against income in later years, following a precedent decision.

Issue 6: Charging of interest under section 234B:
The last issue was about charging interest under section 234B, which was deemed consequential and did not require adjudication. The ITAT allowed the appeal in the result, pronouncing the order in an open court on 12th July 2013.