2015 (12) TMI 899 - AT - Income Tax

Disallowance of loss on revaluation of stock of equity shares - Held that - The assessee has relied upon the entries passed in the books of account and also the fact that the shares were purchased out of borrowed funds in order to support its contentions that it intended to purchase the shares as stock in trade. However, as held by Ld CIT(A), these two factors alone cannot be taken as determinative factors and accordingly the intention of the assessee should be gathered from the conduct of the party and surrounding circumstances. We also notice that the assessee had originally disallowed part of interest expenditure relating to the purchase of shares of M/s Deepak Fertilizers & Petrochemicals Ltd treating the same as investment, but retracted from the same only during the course of assessment proceedings. Hence, in our view, the conduct of the assessee and the factors surrounding the issue shows that the assessee had intended to purchase the shares of the above said company only to hold them as investments. Hence we are of the view that the tax authorities are justified in rejecting the claim of the assessee that it was held as stock in trade. Consequently, the tax authorities are justified in rejecting the claim of revaluation loss arising on account of fall in the price of shares. Disallowance made u/s 14A - Held that - we notice that the assessee itself has admitted that the shares of Deepak Fertilizers & Petrochemicals Ltd were purchased out of loan of ₹ 20.75 crores taken from M/s Nova Synthetics Ltd and the assessee itself has computed the interest of ₹ 40.94 lakhs as pertaining to the investment made in the shares of Deepak Fertilizers. Hence the interest expenditure of ₹ 40.94 lakhs cannot be taken as expenditure relating to the business carried on by the assessee, but it is related to the investment made in the shares. Hence, the interest expenditure is otherwise not allowable under the normal provisions of the Act. Accordingly, we confirm the disallowance of ₹ 40.94 lakhs made by the AO. Disallowance of interest expenditure u/s 24 - Since the assessee had not let out the house property, the AO held that the assessee cannot claim the same u/s 24 of the Act also - Held that - The Ld D.R submitted that the assessee has changed the character of the property from business asset to house property. But the question here is whether the assessee is entitled to claim deduction of interest expenditure u/s 24 of the Act. The Ld CIT(A) has observed that the question of using of personal purposes shall not arise in the case of the assessee herein, since it is a legal person. Hence the restrictions placed in the Act in respect of property held for personal purposes shall not apply to the case on hand. The Ld D.R could not demonstrate as to how the decision rendered by Ld CIT(A) is contrary to the provisions of the Act. Hence, we do not find any reason to interfere with the view taken by Ld CIT(A) on this issue.

Summary

Issues:
1. Disallowance of loss on revaluation of stock of equity shares and disallowance u/s 14A of the Act.
2. Disallowance of interest expenditure claimed against property income.

Analysis:
1. The first issue involves the disallowance of loss on revaluation of shares claimed as business loss. The assessee purchased shares of a company but did not sell them, leading the tax authorities to reject the claim of "Stock in trade." The contention was that the shares were intended for trading, supported by the company's memorandum and borrowed funds. However, the tax authorities found the intention to hold the shares as investments, evidenced by conduct and circumstances. The tribunal upheld the authorities' decision, emphasizing the continuous accumulation of shares and lack of trading activity.

2. The second issue pertains to disallowance u/s 14A of the Act related to dividend income and interest expenditure. The assessee earned dividend income from mutual fund investments and claimed exemption. Disallowances were made concerning interest expenditure on mutual funds and shares of a specific company. The authorities rejected the claim as the shares were deemed investments. The tribunal agreed that the provisions of sec. 14A applied, considering the nature of the investments and interest expenditure. The tribunal confirmed the disallowance, noting the investment source and interest allocation, affirming the tax authorities' decision.

3. The final issue concerns the disallowance of interest expenditure claimed against property income. The assessee purchased a flat using borrowed funds and initially disallowed a portion of interest expenditure. The claim was revised during assessment proceedings, but the AO rejected it as business expenditure due to the property's treatment. The CIT(A) ruled in favor of allowing the interest expenditure under the head "Income from House property," considering the property's usage and rental income computation. The tribunal upheld the CIT(A)'s decision, emphasizing the legal entity status of the assessee and the property's classification, dismissing the appeals filed by both the assessee and the revenue.

In conclusion, the tribunal dismissed the appeals, affirming the decisions of the tax authorities on the issues of loss on revaluation of shares, disallowance u/s 14A, and interest expenditure against property income.