2019 (1) TMI 672 - AT - Income Tax

Nature of income - business income or income from other sources - Non carrying of business operations - set off the business loss against the income from other sources denied - business of trading in shares, stocks, debentures, bonds, fixed and other deposits including finance of short and long term deposits etc. - claim of business expenditure - Held that - The stand of the assessee was accepted by the revenue in all the years as discussed above either the interest income was accepted as business income or the business loss was allowed to set off against the interest income. There was no material change in the facts and circumstances in the year under consideration. Therefore, in our considered view, the Revenue cannot take a different stand in the subsequent year. We also note that the assessee has been carrying on the business of money lending in a systematic manner without having the registration with RBI as NBFC. Merely, the fact that the assessee is not registered with RBI AS NBFC, cannot lead to draw an inference that the assessee is not carrying out the business activity. The registration with RBI as NBFC and business activity of the assessee, both are different aspects and cannot be applied for holding that the assessee is not engaged in the business activity. we also note that the assessee has been carrying on the business of money lending in a systematic manner without having the registration with RBI as NBFC. Merely, the fact that the assessee is not registered with RBI AS NBFC, cannot lead to draw an inference that the assessee is not carrying out the business activity. The registration with RBI as NBFC and business activity of the assessee, both are different aspects and cannot be applied for holding that the assessee is not engaged in the business activity. The genuineness of the expenses claimed by the assessee have not been doubted by the authorities below. Moreover, there is no issue regarding the genuineness/reasonableness of the expenses claimed by the assessee arising from the order of authorities below. Therefore, we are not inclined to adjudicate the same. In view of above, we are of the view that the interest income of the assessee should have been treated as income from business and profession. Therefore, we set aside the order of ld. CIT(A) and direct the AO to treat the interest income of the assessee as income under the head business and profession. Disallowance u/s 14A - Held that - We direct the AO to restrict the disallowance u/s 14A r.w.r. 8D of the Act to the extent of Dividend Income. In view of above the ground of appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Whether the assessee carried out any business operations during the year.
2. Whether the assessee is entitled to set off business loss against income from other sources.
3. Whether the assessee is entitled to deductions for bad debts, professional fees, and depreciation.
4. Whether the disallowance under Section 14A was correctly calculated.
5. Whether the revenue's appeal regarding the deduction of expenses under Section 57(iii) is maintainable given the tax effect.

Issue-wise Detailed Analysis:

1. Business Operations:
The primary issue was whether the assessee carried out any business operations during the year. The assessee, a limited company engaged in trading shares, stocks, debentures, bonds, and finance, showed income from other sources amounting to ?70,42,709/- and claimed expenses totaling ?68,34,897/-. The Assessing Officer (AO) observed that the assessee had not carried out any business activity, thus disallowing the expenses and adding ?60,51,522/- to the total income. The CIT(A) upheld the AO's decision, stating that the assessee had shown interest income under 'income from other sources' and had not carried out any business activity.

2. Set Off of Business Loss:
The assessee argued that it had consistently set off business losses against income from other sources in previous years, which was accepted by the Revenue. The Tribunal noted that the principle of consistency should apply, as there was no material change in facts and circumstances compared to previous years. The Tribunal directed the AO to treat the interest income as business income, allowing the set off of business losses against it.

3. Deductions for Bad Debts, Professional Fees, and Depreciation:
The assessee claimed deductions for bad debts, professional fees, and depreciation. The Tribunal held that once the interest income is treated as business income, the assessee is eligible for these deductions. The Tribunal directed the AO to consider the allowability of these expenses under the head 'business and profession' as per the law.

4. Disallowance under Section 14A:
The CIT(A) had disallowed expenses related to dividend income under Section 14A, amounting to ?1,08,559/-. The Tribunal noted that the disallowance under Section 14A read with Rule 8D cannot exceed the amount of dividend income, which was ?3,597/-. The Tribunal directed the AO to restrict the disallowance to the extent of the dividend income.

5. Revenue's Appeal on Section 57(iii) Expenses:
The Revenue appealed against the CIT(A)'s decision to allow ?44,29,921/- as a deduction under Section 57(iii) for expenses related to income from other sources. The Tribunal observed that the tax effect in the Revenue's appeal was less than ?20 lakhs. As per CBDT Circular No. 3 of 2018, appeals with a tax effect below ?20 lakhs are not maintainable. Consequently, the Tribunal dismissed the Revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to treat the interest income as business income and consider the allowability of expenses accordingly. The Tribunal also restricted the disallowance under Section 14A to the amount of dividend income. The Revenue's appeal was dismissed due to the low tax effect.