2016 (7) TMI 1547 - AT - Income Tax

Addition made u/s 68 - unproved loans taken by the assessee and also for deleting disallowance of interest thereon - HELD THAT - In respect of these loans from the bank, the assessee had provided security to the bank, therefore considering the facts that such funds stems from the bank remains unaltered, and that an inextricable link is being established beyond doubt between the assessee company and the bank loans so received also proves the nature of such credits and the source thereof. We had also verified the confirmation of bank and the bank statement which clearly proves that these loans were directly received from the bank. AO during the assessment proceedings issue summons to the bank asking for details of such loans and statements, in response the bank has produced all the evidence like bank statements of all the forty parties, their account opening forms, as also bank has categorically admitted that the banks had advanced loans to those forty parties, and cheques were directly issued in assessee favour, which goes to prove that the assessee had proved nature and source of the credits and therefore there is no question of addition u/s 68. Detailed finding recorded by CIT(A) at para 3.9 are as per material on record and has not been controverted by ld. DR by bringing any positive material on record which clearly proves that amount so received was nothing but bank loan. An independent evidence was gathered by department also indicate receipt of loan directly from the banks in response to the summons issued to such banks. The findings of the CIT(A) is as per material on record, therefore do not require any interference on our part. Accordingly we confirm the action of CIT(A) deleting the addition made u/s 68 of I.T. Act. Addition in respect of differential rate of interest on loan given by assessee - HELD THAT - after recording the detailed finding with regard to the interest free fund owned by the assessee to the extent of ₹ 52,56,63,100/-, CIT(A) directed the AO to verify as to whether the amount paid for share application is encashed after the encashment of liquidation of shares and if the same is found to be correct then in that case the addition of ₹ 30,55,968/- should be deleted. In view of the fact that finding recorded by CIT(A) at para 6.5 has not been controverted, we do not find any infirmity in the direction so given by CIT(A) for deleting addition after proper verification. In the result ground taken by the revenue is dismissed. Speculation loss under explanation to section 73 - HELD THAT - Assessee had suffered loss in share business but the principal business of assessee was purchase and sale of shares. Income in any business is a positive income and loss is negative income which can be set off against positive income of the subsequent year. When the assessee is engaged in purchase and sale of shares whether explanation to section 73 is attracted with reference to the amendment w.e.f. 1.4.15, has been dealt with by the coordinate bench in case of Fiduciary Shares Stock (P.) Ltd. vs. ACIT 2016 (5) TMI 814 - ITAT MUMBAI Amendment inserted in explanation to section 73 by Finance (No.2) Act,2014 w.e.f. 01.04.2015 is clarificatory in nature and would operate retrospectively from 01.04.1977 from which date the explanation to section 73 was placed on the statute. Accordingly the companies whose principal business is trading of shares, loss incurred by the said company in share trading will not be treated as speculation loss but normal business loss and, hence the same loss can be adjusted against other business income or income from any other sources of the year under consideration. Disallowance of long term capital loss treating the sale of shares as sham transaction - HELD THAT -Investment in these preference shares has been properly shown in Balance Sheet as at 31-3-2001 submitted with the Department while filing the return of income for the A. Y.2001-02 and the Department has accepted the same as genuine while completing the scrutiny assessment for the A. Y.2001- 02. Hence there is no reason and basis in treating such purchases as sham in the subsequent year without proving the same conclusively. Before parting to the matter it pertinent to bring on record that apart from sale of these preference shares the assessee had also sold certain other shares during the previous year. The Id. AO has accepted Short term capital gains on sale of such shares. If the Short term capital gains are accepted on the basis of similar materials and evidences then Long term capital loss ought to have been accepted with the same logic and reasons. Long term and Short term capital losses - HELD THAT - As per documentary evidence placed on record we found that the assessee has discharged onus casted upon him fully and properly in respect of Long/Short term capital losses shown in the return of income. It was the Department, who asserted the transactions not belonged to F.Y. 2002-03 and therefore the initial burden is on the Department to prove such transactions belonged to subsequent year. Once the assessee gives an explanation which in the opinion of the ld. AO is not true and which could not reasonably be true, the burden is on him to prove that what he has claimed is true and whatever burden is on the Department stands shifted thereafter. In view of the above, the opinion formed by the ld. AO that the entire transactions were fabricated to book loss in A.Y. 2003-04 is not supported by any cogent basis and reason or materials is not sustainable. Furthermore the assessee has not claimed any set off of the capital losses and thence there is no reason to form an opinion that the transactions were fabricated to book loss in A.Y. 2003-04 since no benefits have arisen to the assessee out of these transactions. In fact transactions of sales were made during the previous year in the ordinary course of business and the same are supported by valid and legitimate materials and as such there is no reason and basis in taking a different view without establishing the same. The guess work and suspicion, howsoever it may be strong, have no role to play in assessment proceedings. In view of the above we can conclude that assessee had furnished sufficient materials before the AO and as such prima facie onus was discharged to prove the genuineness of the acquisition and sale of shares. Accordingly ground taken by the assessee with regard to its claim of Long term and Short term capital losses is allowed in its favour.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 on account of unproved loans and disallowance of interest thereon.
2. Deletion of addition on account of differential rate of interest on loans given.
3. Direction to allow interest expenses after verification.
4. Treatment of share trading loss as speculation loss under Explanation to Section 73.
5. Disallowance of long-term capital loss treating the sale of shares as sham transactions.
6. Deletion of disallowance of interest.
7. Deletion of addition on account of 'conversion of stock in trade' into 'investments.'
8. Disallowance of long-term and short-term capital losses by treating transactions as not pertaining to the assessment year.
9. Deletion of disallowance of interest and commission income.

Detailed Analysis:

1. Deletion of Addition Made Under Section 68:
The Revenue was aggrieved by the deletion of addition made under Section 68 on account of unproved loans and disallowance of interest thereon. The Assessing Officer (AO) had reopened the assessment based on findings from the subsequent assessment year, disallowing interest paid on loans deemed non-genuine. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the reopening but deleted the addition, noting that the loans stemmed from a definite source (bank) whose identity, creditworthiness, and genuineness were not in doubt. The Tribunal upheld CIT(A)'s decision, emphasizing that the nature and source of advances were established, and the AO's action lacked material evidence to contradict the findings.

2. Deletion of Addition on Account of Differential Rate of Interest:
The AO disallowed proportionate interest on a loan given by the assessee at a lower rate than the interest paid on certain bank loans. The CIT(A) deleted the addition, noting that the loan was given out of funds borrowed at a similar rate, and there was no loss of interest. The Tribunal confirmed CIT(A)'s findings, as the AO's observations were not supported by material evidence.

3. Direction to Allow Interest Expenses After Verification:
The AO disallowed interest expenses on the grounds that borrowed funds were not used for business purposes. The CIT(A) directed the AO to verify the facts and delete the addition if the funds used for share application were encashed after the liquidation of shares. The Tribunal upheld this direction, finding no infirmity in CIT(A)'s order.

4. Treatment of Share Trading Loss as Speculation Loss:
The AO treated the share trading loss as speculation loss under Explanation to Section 73, which was confirmed by CIT(A). The Tribunal, however, noted that the principal business of the assessee was trading in shares, and the amendment to Explanation to Section 73 by Finance (No.2) Act, 2014, which is clarificatory and retrospective, should apply. Thus, the loss should be treated as normal business loss and allowed to be set off against other business income.

5. Disallowance of Long-Term Capital Loss:
The AO disallowed long-term capital loss, treating the sale of shares as sham transactions. The CIT(A) confirmed this action. The Tribunal, however, found that the transactions were supported by valid documents, and the AO's allegations lacked concrete evidence. The Tribunal concluded that the loss was legitimate and should not be disallowed.

6. Deletion of Disallowance of Interest:
In the subsequent assessment years, the Tribunal confirmed CIT(A)'s action of deleting the disallowance of interest, consistent with its findings in the earlier years.

7. Deletion of Addition on Account of 'Conversion of Stock in Trade' into 'Investments':
The AO made an addition for the conversion of stock in trade into investments without providing reasons. The CIT(A) deleted the addition, noting that there was no revenue loss, and the conversion was a legitimate accounting entry. The Tribunal upheld CIT(A)'s decision.

8. Disallowance of Long-Term and Short-Term Capital Losses:
The AO disallowed both long-term and short-term capital losses, alleging that the transactions did not pertain to the assessment year. The Tribunal found that the transactions were genuine and supported by valid documents, and the AO's conclusions were based on assumptions without concrete evidence. The losses were allowed as claimed.

9. Deletion of Disallowance of Interest and Commission Income:
The Tribunal confirmed the deletion of disallowance of interest. For the commission income, the Tribunal restored the matter to the AO for verification of the reversal of commission entries, directing the AO to decide afresh based on the verification.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, emphasizing the need for concrete evidence and proper verification before making additions or disallowances. The Tribunal's detailed analysis and reliance on legal precedents ensured that the assessee's legitimate claims were allowed, and arbitrary actions by the AO were corrected.