2016 (9) TMI 751 - AT - Income Tax

Disallowance of business loss - assessee has not carried out any business activity during the year under consideration - Held that - The facts and circumstances prevailing over the disputed year, as emerged from the record before us, are that during this year, the assessee has not shown any business income but has declared business loss; that during this year, the assessee has not shown any business of Vyaj Badla; that during this year, the AO has noticed that the assessee has not carried out any business activity and that the interest income earned by assessee is declared on own funds. Besides this, schedule -5 of the balance sheet of assessee as at 31st March, 2006 filed before us shows that the assessee has shown a sum of ₹ 17,94,28,895/- under the head Investments . The balance sheet further shows that as per schedule-6, under the current assets, loans and advances, three items are appearing. It is, however, not clear from the balance sheet and profit and loss account filed before us, as to from which heads of above current assets, the assessee has earned interest income so as to decide the correct nature of interest income. So, proper examination is required on this count at the stage of Assessing Officer. If the impugned interest is found to have been earned by assessee from investments as per schedule-5 of the balance sheet, such interest income cannot be treated as business income as per Generally accepted Accounting Principles (GAAP) and if it is found that the said interest income was earned by assessee out of their current assets, loans and advances as per schedule 6 of the balance sheet then the Assessing Officer has to examine whether such loans and advances were the part of prominent/auxiliary nature of business. If the same are found to be the part of prominent/auxiliary nature of business, the interest income earned therefrom, shall be qualified to be treated as business income, irrespective of the fact that the assessee has not done any business of Vyaj Badla during the disputed year. It is also to note that in case all the facts and circumstances emerged during the investigation by AO, are found prevailing over the previous and subsequent years, as contended by assessee, the assessee s claim will be eligible for allowance by applying the rule of consistency and if found otherwise, or if there is any change in the circumstances, the issue shall be decided in accordance with law whether the interest income earned by the assessee should be treated as business income or not. - Decided in favour of assessee for statistical purposes

Issues Involved:
1. Rectification of order by ITAT
2. Disallowance of business loss claimed by assessee
3. Treatment of interest income as business income
4. Rule of consistency in assessing business loss

Analysis:

1. Rectification of order by ITAT:
The appeal of the assessee was dismissed by the Tribunal initially. Subsequently, a miscellaneous petition was filed seeking rectification in the order, which was rejected. The High Court set aside the Tribunal's order and directed the restoration of the appeal for a fresh decision on specific grounds related to the treatment of interest income earned by the assessee during a particular assessment year. This led to the present appeal being reheard before the Tribunal.

2. Disallowance of business loss claimed by assessee:
During the assessment proceedings, the Assessing Officer disallowed the business loss claimed by the assessee, stating that there was no evidence of any business activity conducted by the assessee during the relevant year. The Tribunal upheld this decision, emphasizing the lack of proof of business activity to justify the claimed expenses. The assessee argued that similar expenditures had been allowed in a subsequent assessment year and in the past, based on the company's main objects of investment and finance. However, the Tribunal maintained its stance, leading to the filing of a miscellaneous petition by the assessee.

3. Treatment of interest income as business income:
The High Court directed the Tribunal to decide the appeal specifically on the treatment of interest income of the assessee as business income or otherwise. The Tribunal was tasked with examining whether the interest income earned by the assessee was related to business activities or not, considering the rule of consistency. The Tribunal highlighted the need for a detailed investigation into the sources of the interest income in previous and subsequent years to determine its nature accurately. The balance sheet indicated substantial investments and current assets, requiring a thorough assessment by the Assessing Officer to ascertain the correct classification of the interest income.

4. Rule of consistency in assessing business loss:
The Tribunal emphasized the importance of following a consistent approach in assessing business losses based on past and subsequent years' treatment of similar claims. The Tribunal directed the matter back to the Assessing Officer for a fresh decision on whether the interest income should be considered as business income, depending on its source and relation to the prominent/auxiliary nature of the business activities. The decision was to be made in accordance with the law and the observations made in the judgment, ensuring compliance with the rule of consistency as per the High Court's directions.

In conclusion, the appeal of the assessee was allowed for statistical purposes, with the Tribunal directing a fresh assessment by the Assessing Officer to determine the treatment of interest income and business loss in alignment with the rule of consistency and legal principles.

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