2015 (2) TMI 975 - AT - Income Tax

Disallowance of interest paid - CIT(A) deleting the addition - Held that - As found from record that interest was paid by assessee in respect of term loan taken for purchase of immovable properties, which was utilized for the purpose of business. We found that the property was used for running of pre-schooling business by the assessee. As per the finding recorded by the CIT(A), the term loan was taken against mortgage of immovable properties which are used by assessee for the purpose of pre-schooling business, assessee was eligible for deduction of interest u/s.36(1)(iii). The findings recorded by CIT(A) have not been controverted. - Decided against revenue. Disallowance of foreign traveling expenses - CIT(A) deleting the addition - Held that - Foreign travelling undertaken by assessee to various schools was in connection with pre-schooling business, significant expansion of the assessee s pre-schooling business, introduction of private equity therein. A categorical finding recorded by CIT(A) to the effect that foreign travelling expenses were incurred wholly and exclusively for the purpose of assessee s business which has not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of travelling expenses. - Decided against revenue. Share transactions - Capital gain or business transaction - CIT(A) in respect of delivery based transactions of shares which were held as investment held that the gains so arose on sale of shares was liable to be taxed as capital gain tax - CIT(A) has also confirmed AO s action with regard to loss of ₹ 59,64,109/- and treated the same as business loss instead of capital loss - Held that - After analyzing the entire set of transactions the CIT(A) recorded detailed finding and reached to the conclusion that out of ₹ 1,01,89,029/- the assessee s profit of ₹ 80,51,168/- was liable to be taxed as capital gain and balance as business income. The short term capital loss of ₹ 1,22,76,554/- was not accepted by the CIT(A) and he confirmed the action of the AO for treating the same as business loss. The CIT(A) has also directed the proportionate effect of interest pertaining to earning of short term capital gain as claimed in the profit and loss account is to be disallowed while working out the business income. After analyzing the series of transaction, the CIT(A) held that business income of ₹ 1,12,79,891/- from derivative transactions and ₹ 80,10,911/- shall be separately assessed in addition to the business income from delivery based share transaction. Thus, the CIT(A) has directed the AO to rework sale of shares held as investment by the assessee under the head short term capital gain and balance was directed to be assessed as business income. The detailed findings recorded by the CIT(A) are as per materials on record, has not been controverted by department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the order of CIT(A). - Decided against revenue.

Issues Involved:
1. Deletion of addition on account of interest paid.
2. Deletion of addition on account of foreign traveling expenses.
3. Classification of income from share transactions as short-term capital gain versus business income.
4. Utilization of term loan for business purposes.
5. Evidence of foreign travel being for business purposes.
6. Volume and frequency of share transactions indicating business activity.
7. Precedent cases supporting the classification of share transactions as business income.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest Paid:
The CIT(A) allowed the assessee's claim for interest deduction under section 36(1)(iii) of the I.T. Act. The interest was paid on a term loan for immovable properties used for the pre-schooling business. The properties were not under construction and were used exclusively for business purposes. The CIT(A) found the interest expenditure to be allowable, and this finding was not controverted by the Revenue.

2. Deletion of Addition on Account of Foreign Traveling Expenses:
The CIT(A) deleted the disallowance of foreign traveling expenses of Rs. 1,95,654/-, incurred for visiting schools in Hong Kong and Singapore. The CIT(A) accepted the assessee's explanation that the trip was for business purposes, specifically for studying pre-schooling patterns and meeting NRIs for business expansion. The AO's conclusion that the trip was for pleasure was not supported by evidence. The CIT(A) found the expenses to be wholly and exclusively for business purposes, and this finding was upheld as the Revenue did not provide contrary evidence.

3. Classification of Income from Share Transactions:
The CIT(A) directed the AO to treat the income from delivery-based share transactions as short-term capital gain (STCG) and non-delivery based transactions as business income. The CIT(A) observed that the assessee maintained separate accounts for investment and trading activities. The CIT(A) noted that the assessee's main business was running pre-schools, not share trading, and the investment in shares was for capital appreciation. The CIT(A) held that the AO's treatment of STCG as business income was not justified without new facts or material. The CIT(A) relied on various judicial precedents, including the decision in Gopal Purohit, where delivery-based transactions were treated as investment activities.

4. Utilization of Term Loan for Business Purposes:
The CIT(A) found that the term loan was used for acquiring immovable properties utilized in the pre-schooling business. The interest paid on this loan was deemed deductible under section 36(1)(iii). The CIT(A) noted that the properties were already in use for business purposes, thus allowing the interest deduction.

5. Evidence of Foreign Travel Being for Business Purposes:
The CIT(A) accepted the assessee's explanation that the foreign travel was for business purposes, specifically for studying pre-schooling patterns and meeting potential investors. The AO's conclusion that the trip was for pleasure was not supported by evidence. The CIT(A) found the expenses to be wholly and exclusively for business purposes.

6. Volume and Frequency of Share Transactions Indicating Business Activity:
The CIT(A) analyzed the volume and frequency of share transactions and concluded that the delivery-based transactions were for investment purposes. The CIT(A) noted that the assessee's main business was running pre-schools, and the share transactions were not frequent enough to be considered as business activity. The CIT(A) held that the AO's reliance on volume and frequency was not sufficient to classify the transactions as business income.

7. Precedent Cases Supporting the Classification of Share Transactions as Business Income:
The CIT(A) considered various judicial precedents, including the decision in Gopal Purohit, which supported the classification of delivery-based share transactions as investment activities. The CIT(A) noted that the AO's treatment of STCG as business income was not justified without new facts or material. The CIT(A) relied on the principle of consistency and judicial precedents to classify the share transactions as capital gains.

Conclusion:
The CIT(A) allowed the assessee's claims for interest deduction and foreign traveling expenses, and directed the AO to treat the income from delivery-based share transactions as short-term capital gain. The CIT(A) found that the term loan was used for business purposes and the foreign travel was for business purposes. The CIT(A) relied on judicial precedents and the principle of consistency to classify the share transactions as capital gains. The Tribunal upheld the CIT(A)'s findings, dismissing the Revenue's appeal.

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