2022 (11) TMI 366 - AT - Income Tax

Disallowance of expenses claimed - assessee has not carried on any business activity - assessee is aggrieved by the decision of CIT(A) in upholding assessment of interest income under the head Income from other sources rejecting the claim of the assessee to assess the same under the head Income from business - HELD THAT - On a perusal of the financial statements, we notice that the securities held as stock in trade has been attached by SEBI, meaning thereby, the assessee could not have carried on trading activities at all, even if the claim of the assessee is accepted on merits. This leads a situation that the assessee could not have carried on trading activities. Further, notice that the assessee has not brought in fresh funds in order to continue to carry on share trading activities. Under these set of facts, we do not find any merit in the contentions of the assessee and accordingly, we hold that the assessee has not carried on any business activity during the financial year relevant to AY 2008-09. CIT(A) has allowed part of expenses, but it is the contention of the assessee that the CIT(A) has not allowed all relevant expenses, particularly depreciation and other relevant expenses. Hence, the expenses required to be incurred in order to maintain the corporate status, legal expenses and other necessary expenses which are required to be incurred invariably to run the company should be allowed as deduction in the hands of the assessee. Accordingly, we modify the order passed by Ld CIT(A) on this issue and direct the AO to allow all expenses incurred to maintain corporate status, legal expenses and other necessary expense which are required to be incurred invariably in order to run the company. AO may decide the quantum of expenses after affording opportunity to the assessee. Nature of Interest Income - With regard to the issue of the head of income under which the interest income is assessable, restore this issue to the file of AO, since the AO has not made any discussion on the same. The nexus between the deposits and business compulsions should decide the head of income under which the interest income is assessable. Accordingly, the AO may examine this issue afresh after affording adequate opportunity of being heard to the assessee. With regard to the revaluation loss claimed by the assessee, same should be allowed as deduction, since the revaluation of stock as at the yearend was the consistent practice followed by the assessee. Such revaluation will not fall within the scope of ban imposed upon the assessee with regard to share broking and merchant banking activity of the assessee. Accordingly, direct the AO to allow loss arising on revaluation of stock of securities.

Summary

Issues:
- Disallowance of expenses claimed by the assessee for not carrying on any business activity during the relevant years
- Assessment of interest income under the head Income from other sources instead of Income from business for AY 2008-09
- Allowability of expenses incurred to maintain corporate status and legal expenses

Issue 1: Disallowance of Expenses for Not Carrying on Business Activity

The assessee, involved in broking and trading in shares and securities, faced restrictions from SEBI following investigations into market manipulations. SEBI debarred the assessee from stockbroker or merchant banker activities from April 5, 2001. The Hon'ble Supreme Court confirmed this decision on May 18, 2007. The AO disallowed various expenses claimed by the assessee for AY 2008-09, as the business was not operational. The CIT(A) partially allowed expenses related to maintaining corporate status and legal expenses. The assessee contended that share trading and consultancy activities were not barred by SEBI, but the Tribunal found that trading activities were hindered due to attached securities and lack of fresh funds. The Tribunal upheld disallowance of business-related expenses but allowed expenses necessary for maintaining corporate status and legal expenses.

Issue 2: Assessment of Interest Income

For AY 2008-09, the AO assessed interest income under Income from other sources, rejecting the assessee's claim to assess it under Income from business. The Tribunal remanded this issue to the AO for determining the nexus between deposits and business compulsions to decide the appropriate head of income for interest income. The AO was directed to re-examine the issue after providing the assessee with a fair opportunity to present its case.

Issue 3: Allowability of Expenses Incurred

The Tribunal directed the AO to allow expenses incurred to maintain corporate status, legal expenses, and other necessary expenses essential for running the company. It emphasized that such expenses should be deductible, as they were required for maintaining the corporate entity and contesting legal cases. The AO was instructed to determine the quantum of these expenses after hearing the assessee. The Tribunal also allowed the revaluation loss claimed by the assessee, as it was a consistent practice and not related to the banned activities. The appeal for AY 2011-12 was restored to the AO for fresh examination based on the discussions in the AY 2008-09 appeal.

In conclusion, the Tribunal partly allowed both appeals of the assessee, emphasizing the deductibility of specific expenses while upholding the disallowance of business-related expenses due to the non-operational status caused by regulatory restrictions.