2015 (10) TMI 2800 - AT - Income Tax

Loss arising on transfer of assets - Loss under the head 'Income from Business or Profession' OR 'Loss from Short Term Capital Gains' - whether the amount of loss is to be treated as short term capital loss as claimed by the assessee or as business loss as treated by the lower authorities? - HELD THAT - Since the findings of the Ld. CIT(A) for A.Y. 2006-07 have been reversed by the Tribunal by order dated 2014 (1) TMI 1599 - ITAT MUMBAI and it is also an admitted fact that the investment pattern/ share transaction activity is almost identical to that of the earlier assessment year, hence, applying the same ratio and for the sake of principle of consistency, we hold that the short term capital loss returned by the assessee has to be treated as such and not as business income of the assessee. This issue is accordingly decided in favour of the assessee. Disallowance u/s 14A in relation to the expenditure incurred for earning of exempt income - HELD THAT - A perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon ble Bombay high Court in the case of Godrej Boyce 2010 (8) TMI 77 - BOMBAY HIGH COURT while making the disallowance . He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance. So keeping in view of the overall facts and circumstances of the case, we restore this issue back to the file of the AO with a direction that the AO will give opportunity to the assessee to place on record all the relevant facts including its accounts and then examine the computation/calculation made in this regard by the assessee having regard to the accounts of the assessee. The AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration. After going through the details provided by the assessee, the AO will decide the issue by way of a speaking order in the light of the observations made above. Disallowance of interest expenditure on interest free loan given - HELD THAT - As observed that the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that if there are funds available, both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment. Similar proposition can be applied in the case of assessee also. If the assessee is able to prove that sufficient own funds were available with the assessee then it has to be presumed that interest free loans were advanced by the assessee out of his own funds. This is required to be demonstrated from his accounts by the assessee before the AO. Further the assessee has claimed that it is a case of double disallowance. We accordingly restore the matter to the file of the AO to decide this issue afresh and also to verify as to whether any double disallowance has been made on this issue and to decide the issue in accordance with law.

Summary

Issues:
1. Treatment of loss as short term capital loss or business loss.
2. Disallowance under section 14A of the Income Tax Act.
3. Disallowance of interest expenses on interest-free loan.
4. Charging of interest under sections 234A, 234B, 234C, and 234D.
5. Initiation of penalty proceedings under section 271(1)(c).

Issue 1: Treatment of Loss
The appeal centered on whether a loss of &8377; 4,74,810 should be classified as short term capital loss or business loss. The Assessing Officer considered the assessee a trader due to high-frequency share transactions and categorized the loss as business loss. However, the Tribunal reversed a similar decision from a previous year, holding that the loss should be treated as short term capital loss, not business income, due to consistent investment patterns. The Tribunal emphasized the principle of consistency and ruled in favor of the assessee.

Issue 2: Disallowance under Section 14A
The AO disallowed &8377; 24,92,047 under section 14A for expenditure related to earning exempt income. The CIT(A) upheld this disallowance based on Rule 8D, citing a Bombay High Court decision. However, the Tribunal found that the AO and CIT(A) did not follow the guidelines for objective satisfaction as per the court ruling. The issue was remanded to the AO for a fresh examination, directing the AO to consider the assessee's submissions and provide a speaking order.

Issue 3: Disallowance of Interest Expenses
The assessee contested the disallowance of &8377; 11,89,256 interest expenditure on an interest-free loan. The Tribunal referred to a court ruling establishing a presumption that interest-free loans are advanced from own funds if sufficient funds are available. The matter was remanded to the AO for further review and verification of any double disallowance.

Issue 4: Charging of Interest
The assessee challenged the charging of interest under sections 234A, 234B, 234C, and 234D, which was deemed consequential and did not require immediate action.

Issue 5: Penalty Proceedings
The initiation of penalty proceedings under section 271(1)(c) was considered premature and not requiring adjudication at the current stage.

In conclusion, the appeal was treated as allowed for statistical purposes, with specific issues either decided in favor of the assessee, remanded to the AO for fresh examination, or deemed consequential or premature for immediate action.