2017 (9) TMI 378 - AT - Income Tax

Addition u/s 14A - Held that - If there is no exempt income, disallowance u/s 14A not to be made. See Cheminvest Ltd. Vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT . Loss on sale of mutual funds - capital loss OR business loss - mutual funds held as stock in trade - Held that - It is undisputed fact that the loss has been incurred during the normal course of the business. Since the assessee s only source of income was his interest and in this view the loss incurred on the sale of mutual fund has to be held as business loss. Therefore, this issue is covered by the judgment of the Hon ble Supreme Court in the case of CIT vs Cocanada Radhaswami Bank Ltd. (1965 (4) TMI 11 - SUPREME Court) wherein it was held that since the entire income of the assessee include interest on securities, the assessee was entitled to set off such losses out of its business income. We also note that AO cannot dispute that the loss arising from sale of investment will be capital gain as against business loss claimed by the assessee. The same stand was followed by the assessee in the earlier years and there is no addition made by the AO in the earlier and succeeding years. Thus addition deleted. Assessee appeal allowed.

Summary

Issues:
1. Disallowance under section 14A of the Act.
2. Treatment of loss on sale of mutual funds as capital loss or business loss.

Issue 1: Disallowance under section 14A of the Act:
The Assessee challenged the disallowance of ?37,500 under section 14A. The Assessing Officer (AO) invoked section 14A due to the Assessee's investments in Mutual Funds, despite the Assessee claiming no tax-free income. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the disallowance. However, the Tribunal referred to the decision in the case of Cheminvest Ltd. vs. CIT [2015] 378 ITR 33 (Del), where it was ruled that disallowance under section 14A must be made even in the absence of exempt income. As the Assessee had no exempt income during the relevant year, the Tribunal deleted the disallowance.

Issue 2: Treatment of loss on sale of mutual funds:
The Assessee incurred a loss of ?29,82,952 on the sale of Mutual Funds, claiming it as a business loss. The AO treated it as a capital loss, disallowing the claim. The Assessee argued that the loss was incurred in the normal course of business and should be treated as a business loss. The Tribunal noted that the Assessee's primary income source was interest, and the loss on the sale of Mutual Funds should be considered a business loss. Citing the judgment in CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC), the Tribunal allowed the Assessee's claim, emphasizing that the AO had not challenged similar claims in previous or subsequent years. Therefore, the Tribunal deleted the addition of ?29,82,952, allowing the Assessee's appeal.

In conclusion, the Tribunal allowed the Assessee's appeal, deleting both the disallowance under section 14A and the addition related to the loss on the sale of mutual funds.