2013 (11) TMI 977 - AT - Income Tax

Bad debts or business loss Held that - The assessee miserably failed to prove that the present transaction was in the nature of a business transaction - The amount given as advance was never given with the intention of doing any business in real estate . The assessee never intended to carry on such business of real estate - This solitary transaction of paying Rs.37.50 lakh to M/s.ZEPL was with the object or making an Investment and the non-receipt of refund of Rs.15 lakh out of such transaction cannot be characterized as anything but a loss of capital nature Following Bengal & Assam Investors Ltd. VS. CIT 1965 (11) TMI 31 - SUPREME Court - The object clause in M/A is not decisive because question is not what business company professes to carry on but what business it actually carries on Decided against assessee. Sale of shares Business income or capital gain - Held that - The assessee valued such shares at cost price in the respective balance-sheets from the date of purchase - If these shares had been treated as stock-in-trade , then these would have been valued at Cost or market price, whichever is less - The fact that the mistake in disclosing these shares as Stock-in-trade was rectified by way of the Board s resolution also substantiates the claim that these shares were in fact held as Investment - Nomenclature of a transaction is not relevant. It is the real character of the transaction which is looked into - The facts and circumstances of the case should be considered - The period of holding of more than two years and the valuation of such shares at cost price in the earlier balance-sheet shows that the shares were in fact held as Investment . Once the shares are held as Investment, any profit or loss from their transfer has to be considered under the head Capital gains and not as Business income Decided against Revenue. Disallowance u/s 14A Held that - Following Dhanuka & Sons VS. CIT 2011 (4) TMI 861 - CALCUTTA HIGH COURT - Disallowance u/s 14A is attracted even when the securities fetching exempt income are held as stock in trade. Following Godrej & Boyce Mfg. Co. Ltd. VS. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D of the IT Rule, 1962 is applicable from AY 2008-09 - The disallowance u/s. 14A of the Act can be made on reasonable basis in the years anterior to AY 2008-09 For the AY 2006-07 the disallowance is required to be made u/s. 14A of the Act on some reasonable basis - The Kolkata Bench of the Tribunal has sustained addition in several cases u/s. 14A at the rate of 1% of the exempt income in the years prior to the A.Y. 2008-09 Partly allowed in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Rs.15 lakh claimed as 'Bad debts written off'.
2. Treatment of Rs.9,22,445/- as Long Term Capital Gains (LTCG) instead of 'Business profit'.
3. Deletion of addition of Rs.15,000/- made under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Rs.15 lakh claimed as 'Bad debts written off':
The assessee wrote off Rs.15 lakh as bad debts in its Profit and Loss account, which was an unrecovered amount from an advance of Rs.37.50 lakh given to M/s. Zeal Entrepreneurs Pvt. Ltd. (ZEPL) for purchasing land. The transaction did not materialize, and after partial recovery and settlement, Rs.15 lakh remained unrecovered. The Assessing Officer (AO) denied the deduction, stating that the advance was not incidental to the assessee's business, which was not in real estate. The Tribunal upheld this view, noting that the assessee did not prove that it was engaged in the business of real estate, and the transaction was an investment rather than a business activity. The loss was thus capital in nature and not deductible as a business loss.

2. Treatment of Rs.9,22,445/- as Long Term Capital Gains (LTCG) instead of 'Business profit':
The assessee reported Rs.9,22,445/- as LTCG from the sale of Indo Gulf Fertilizers Ltd. (IGFL) shares, which were previously shown as stock-in-trade. The AO treated this as business income, but the CIT(A) accepted the assessee's claim of LTCG, noting that the shares were held as investments, despite being marked as stock-in-trade due to an inadvertent error. The Tribunal agreed, emphasizing the period of holding (over two years) and consistent valuation at cost price, which supported the treatment of the shares as investments. Thus, the profit was correctly classified as LTCG.

3. Deletion of addition of Rs.15,000/- made under section 14A of the Income Tax Act:
The AO disallowed Rs.15,000/- under section 14A for expenses related to exempt dividend income, which the CIT(A) deleted. The Tribunal noted that disallowance under section 14A applies even if securities are held as stock-in-trade, citing precedents from the jurisdictional High Court and other High Courts. However, for the assessment year 2006-07, Rule 8D was not applicable, and disallowance had to be on a reasonable basis. The Tribunal directed a disallowance at 1% of the exempt income, aligning with precedents for years prior to AY 2008-09.

Conclusion:
The assessee's appeal was dismissed, and the Revenue's appeal was partly allowed. The Tribunal upheld the disallowance of Rs.15 lakh as a capital loss, confirmed the treatment of Rs.9,22,445/- as LTCG, and directed a reasonable disallowance of Rs.15,000/- under section 14A at 1% of the exempt income.