2016 (3) TMI 413 - AT - Income Tax

Addition made on account of accrued interest on OFCPNs/DDBs - Held that - CIT(A) in his order observed that this issue is squarely covered in favour of the assessee by the decision of Co-ordinate Bench of this Tribunal in the case of Kisan Discretionary Family Trust 2007 (11) TMI 622 - ITAT AHMEDABAD - Decided in favour of assessee Disallowance of loss on sale of Optionally Fully Convertible Promissory Notes - Held that - The assessee converted the investment into stock in trade and conversion was allowed under Income-tax Act. There is no legal bar for such conversion. If the assessee had not converted the investment into stock in trade, the total loss suffered would have been claimed as loss under short term/long term capital gain as the case may be. However, when the assessee converted it into stock in trade, the loss suffered between the date of investment to the date of conversion was treated as loss under capital gain assessable in the year when sale was made and loss from the date of conversion to the date of sale was to be treated as business loss, which assessee claimed. The valuation on date of conversion into stock in trade was taken on the basis of report of Chartered Accountant. There was no contrary sale price available on the date of conversion. When the purchase & sales are genuine and purchases & sale prices are accepted, the parties are independent and not related to the assessee u/s.40A(2)(b) of the Act and there was no evidence that suppressed sale price difference came back to the assessee, the loss on sale could not be disallowed as loss arising from sham transaction or as bogus loss. Hence, the addition made by the Assessing Officer was rightly deleted by the CIT(A). - Decided in favour of assessee Disallowance out of administrative and other expenses and payment to and provision for employees u/s 14A - Held that - We are inclined to concur with the findings of the CIT(A) who has rightly deleted the disallowance in question, because the dividend income, agricultural income and other incomes of the assessee having found no nexus with the expenses incurred by the assesseecompany. The assessee-company is a member of Association of Persons (AOP) and AOP is a separate legal entity. The assesseecompany received share of profit from AOP. The expenses incurred by the assessee-company have no direct or indirect nexus for receipt of share of profit from AOP and the profit on sale of security is the income assessable to tax under the head capital gain. The assessee-company had offered short term capital gain of ₹ 2,79,33,377/- and long term capital gain of ₹ 88,68,072/- which was considered for taxation in the return of income and the same was also assessed in the assessment order passed u/s 143(3) of the Act. In view of the above, the CIT(A) was rightly deleted the addition in question i.e. ₹ 3,64,050/- made u/s 14A of the Act. - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of addition made on account of accrued interest on OFCPNs/DDBs.
2. Disallowance of loss on sale of OFCPNs of Ideal Petro Products and Shree Rama Polysynth Pvt Ltd.
3. Disallowance of interest expenditure u/s 14A of the Act.

Issue 1: Deletion of Addition on Accrued Interest:
The assessee filed appeals against the orders of the Commissioner of Income-Tax for Assessment Years 2004-05 and 2005-06. The first issue concerned the deletion of addition made on accrued interest on OFCPNs/DDBs. The CIT(A) deleted the addition, citing a previous Tribunal decision in favor of the assessee. The ITAT confirmed this decision, stating that the issue was covered by precedent and upheld the CIT(A)'s order.

Issue 2: Disallowance of Loss on Sale of OFCPNs:
The second issue involved the disallowance of loss on the sale of OFCPNs of Ideal Petro Products and Shree Rama Polysynth Pvt Ltd. The Assessing Officer treated the claimed loss as artificial business loss, which was disputed by the assessee. The ITAT examined the transactions, finding them genuine and not related to the assessee. The conversion of investments into stock in trade was allowed under the Income-tax Act, and the loss claimed was upheld as a legitimate business loss. The ITAT upheld the CIT(A)'s decision to delete the addition made by the Assessing Officer.

Issue 3: Disallowance of Interest Expenditure u/s 14A:
The final issue pertained to the disallowance of interest expenditure under section 14A of the Income-tax Act. The Assessing Officer disallowed expenses incurred for earning exempt income. The CIT(A) found no direct expenses related to the exempt income and deleted the disallowance. The ITAT concurred with the CIT(A)'s findings, noting that the expenses incurred had no nexus with the income earned. The ITAT upheld the deletion of the disallowance made under section 14A of the Act.

In conclusion, both appeals filed by the Revenue were dismissed by the ITAT, affirming the decisions of the CIT(A) on all issues.