2021 (8) TMI 597 - AT - Income Tax

Penalty u/s.271(1) - deduction u/s 80P(2)(a)(i) - AO opined that the activity of making investment in mutual funds or income from mutual funds did not fall under the head Business of banking as these transactions were not with the members of assessee society and hence no deduction u/s 80P was admissible - HELD THAT - We do not find much force in the contention of Revenue for the obvious reason that when the business itself was not allowed to be carried on to the assessee, the investment made in mutual funds, etc. cannot amount to fetching business income. Ex consequenti, the profit or loss from transfer of such mutual funds, etc. would fall under the head Capital gains . On the question of taxability of interest on FDRs with nationalized banks, we hold that the same shall be taken as Income from other sources and cannot be construed as income from business. We, therefore, accord our imprimatur to the finding given by the ld. CIT(A) in this regard. Allowing set off of loss against the income from transfer of capital gains - We hold that the assessee is entitled to set off the loss from mutual funds, etc. against the income from mutual funds, etc. However, this exercise requires examination of the amount of loss incurred from sale of mutual funds, etc. during the year and the amount of loss brought forward from earlier years eligible for set off against income from mutual funds during the year. Such an exercise can be carried out only after considering the break-up of the loss, which information is not available on record. We, therefore, overturn the impugned order on this score and remit the matter to the file of the AO for examining the details of loss incurred by the assessee during the year and that brought forwarded from earlier years and then allow set off in terms of sections 70/71 (for the same year) and section 74 (for the brought forward losses) of the Act. Both the sides agree that the facts and circumstances of the appeal for the later year are mutatis mutandis similar. Following the view taken hereinabove for the A.Y. 2007-08, we hold that income from sale of mutual funds, etc. would fall under the head Capital gains , interest on FDs, etc. would fall under the head Income from other sources and the amount of loss for the year and brought forward loss from sale of mutual funds would be set off in terms of sections 70/71 and 74 of the Act.In the result, these two appeals are partly allowed for statistical purposes. Defective notice u/s 274 - Where the charge is not properly set out in the notice u/s 274 viz., both the limbs stand therein without striking off of the inapplicable limb, but the penalty has, in fact, been levied for one of the two, such a penalty order gets vitiated. Turning to the facts of the extant case, we find from the notice u/s 274 of the Act that the AO did not strike out the irrelevant limb. Respectfully following the Full Bench judgment of the Hon ble jurisdictional High Court, we affirm the order of ld. CIT(A) in rightly deleting the penalty levied by AO.

Summary

Issues:
- Eligibility of deduction u/s 80P(2)(a)(i)
- Tax treatment of income from sale of mutual funds
- Taxability of interest on FDRs with nationalized banks
- Set off of loss against income from capital gains
- Deletion of penalty imposed u/s 271(1)(c)

Eligibility of deduction u/s 80P(2)(a)(i):
The case involved a Co-operative society claiming deduction u/s 80P of the Income-tax Act for the A.Y. 2007-08. The society earned profits from the sale of units of mutual funds, which it claimed as deductible u/s 80P(2)(a)(i). The AO disallowed the deduction, stating that the society's activities did not fall under the 'Business of banking' as transactions were not with its members. The Tribunal, in a second round of proceedings, held that since the society did not carry on the business for which it was set up, it was not entitled to the deduction u/s 80P(2)(a)(i). The Tribunal also determined that the gain on the sale of mutual funds fell under 'Capital gains' and not 'Business income'.

Tax treatment of income from sale of mutual funds:
The Tribunal further decided that the income from the sale of mutual funds, considering the circumstances, should be treated as 'Capital gains' and not 'Business income'. The Tribunal upheld the ld. CIT(A)'s decision that interest earned from FDRs with nationalized banks should be taxed as 'Income from other sources' and not as income from business.

Taxability of interest on FDRs with nationalized banks:
Regarding the taxability of interest on FDRs with nationalized banks, the Tribunal concurred with the ld. CIT(A) that such interest should be considered as 'Income from other sources' and not as income from business activities.

Set off of loss against income from capital gains:
The Tribunal acknowledged the assessee's entitlement to set off losses from mutual funds against income from mutual funds. However, it directed a detailed examination of the losses incurred during the year and brought forward losses for proper set off in accordance with relevant sections of the Income-tax Act.

Deletion of penalty imposed u/s 271(1)(c):
The Tribunal dismissed the Revenue's appeal against the deletion of the penalty imposed u/s 271(1)(c) for the A.Y. 2008-09. It was found that the penalty was based on a wrong claim of deduction u/s 80P(2)(a)(i), falling under 'furnishing inaccurate particulars of income'. The Tribunal, following relevant judgments, held that the penalty notice was defective as both limbs were present without striking off the irrelevant one, leading to the penalty order being vitiated.

In conclusion, the Tribunal partly allowed the quantum assessment appeals for the A.Ys. 2007-08 and 2008-09 for statistical purposes and dismissed the penalty appeal for the A.Y. 2008-09.