2016 (3) TMI 587 - AT - Income Tax

Income from profit in future and option transactions - whether assessable u/s.68? - business income v/s income from other sources - setting off the assessed business loss against the income denied - Held that - The admitted facts are that the Assessee has shown the profit in transactions of futures and options of ₹ 5,51,362/- in his profit and loss account and the resultant income of ₹ 89,200/- was declared in the return of income. The aforesaid income of ₹ 5,51,362/- was treated as income from business. The AO was not satisfied with the explanation with regard to the source of income as one from business. After doing so, the AO has no other option but to classify the income in question under any of the heads of income given in Sec.14 of the Act. Income which does not fall under any other head of income had to be necessary classified under the head Income from other sources , if the AO wants to bring the same to tax. This aspect is clear if one reads the decision of the Hon ble Supreme Court in the case of Nalinikant Ambalal Mody Vs. CIT (1966 (5) TMI 13 - SUPREME Court) wherein it was held that if income cannot be taxed under any of the heads mentioned in Sec.14 of the Act, then it cannot be taxed at all. The AO in coming to the conclusion that the sum of ₹ 5,51,362 had to be taxed separately had not made any reference to any provision of law in the Act under which he is resorting to such a course. Consequently, even assuming the income in question is not treated as income from business, it has to be treated as income from other sources. If so treated, there can be no tax on the said income separately without set off of loss from business u/s.71 of the Act. Thus the levy of tax on the sum of ₹ 5,51,362/- cannot be sustained. Therefore of the view that the addition made by the AO cannot be sustained and the same is directed to be deleted. Decided in favour of assessee Addition for deemed interest income of the appellant - Held that - The entire basis of addition made by the AO was erroneous. It is not the case of the AO that borrowed funds on which interest was paid were not used for the purpose of business and therefore the interest expenditure cannot be allowed u/s.36(1)(iii) of the Act. Therefore the non-payment of interest on loans borrowed has no relevance whatsoever. As far as interest received by the Assessee is concerned, so long as borrowed funds on which interest is paid and claimed as deduction is not given as interest free loans, the AO cannot compel that the Assessee should earn interest on any lending by it. There is no provision in the Act by which notional income on such lending can be brought to tax. The decision of the Hon ble Madras High Court in the case of CIT Vs. J Chelladurai (2011 (12) TMI 41 - MADRAS HIGH COURT) clearly supports the stand of the Assessee in this regard. - Decided in favour of assessee

Summary

Issues:
1. Assessment of income from profit in future and option transactions under section 68.
2. Set off of assessed business loss against the income.
3. Addition of deemed interest income.

Analysis:

Issue 1: Assessment of income from profit in future and option transactions under section 68
The Assessee, a partnership firm, declared total income for AY 2008-09 with a profit in Futures & Options of Rs. 5,51,362. The Assessee transacted through a broker but was not registered as a client with the exchange. The AO, unsatisfied with the explanation, classified the income under "Income from other sources." The AO disallowed setting off the income against any loss. The CIT(A) upheld the AO's decision. However, the Tribunal ruled in favor of the Assessee. Referring to the Supreme Court's decision in Nalinikant Ambalal Mody Vs. CIT, the Tribunal held that if income cannot be taxed under any head, it cannot be taxed at all. As the AO did not specify any provision for separate taxation, the Tribunal directed deletion of the addition.

Issue 2: Set off of assessed business loss against the income
The AO computed the total income, reducing the profit in futures and options from the declared amount. The resulting loss was further reduced due to disallowed interest, resulting in a business loss carried forward. The AO did not allow setting off the assessed business loss against the income. The Tribunal, ruling in favor of the Assessee in Issue 1, indirectly addressed this issue by allowing the appeal against the addition of the income, implying the set off of the business loss.

Issue 3: Addition of deemed interest income
The AO added Rs. 60,938 as deemed interest income due to loans given without charging interest. The Assessee argued that interest income cannot be presumed from interest-free loans and highlighted specific facts. The CIT(A) upheld the addition, but the Tribunal disagreed. It stated that the AO's basis for the addition was erroneous and lacked legal authority. Referring to a Madras High Court decision, the Tribunal directed the deletion of the addition, emphasizing that notional income on lending cannot be taxed.

In conclusion, the Tribunal allowed the Assessee's appeal, directing the deletion of additions made by the AO and CIT(A) related to the assessed income and deemed interest income.