2024 (6) TMI 1217 - AT - Income Tax

Disallowance of interest paid on loan taken from Hyderabad Mutual Benefit Society (HMBS) - DR has submitted that no evidence was shown by the assessee to the lower authorities that the loan amount was utilized for the business purpose after taking loan from HMBS and to that effect the C.A. of the assessee has given a Certificate which has been considered by the learned lower authorities - whether the amount has been received through banking channels or not? - HELD THAT - From a perusal of the list of documents we find the assessee had filed a certificate and ledger account certifying that the documents issued by HMBS were available with the Assessing Officer. However the date of the document dt. 14.04.2017 which is subsequent to passing of the assessment order clearly shows that these documents are not available with the AO. Therefore in our view the submission that the document was available with the AO is incorrect. We expect the learned advocate to be fair while filing the certificate of certifying documents and making the submissions before us. In our view the application should have been filed by the assessee for admission of the additional documents / evidences before the lower authority as well as before us before assessee choses to rely upon the documents / evidences. With respect to the letter issued by HMBS certifying that the interest instalments were paid by the assessee we are of the opinion that the AO is required to verify whether the interest certificate issued by HMBS is correct or not and further the Assessing Officer is required to verify whether the amount received by HMBS was from banking channels or not. AO is also required to verify whether the amount allegedly deposited by the common partner of M/s. G.B. Bakers was claimed by the said partner as expenditure in the books of accounts of M/s. G.B. Bakers or not. Since the statements of bank account was not available before the AO/ CIT(A) therefore there was no question of examination of his bank statement and give finding. Thus we remit the matter to the file of ld.CIT(A) with a direction to the assessee to move appropriate application for admission of additional evidence before ld.CIT(A) in respect of documents now filed before us. Ground allowed for statistical purposes. CIT(A) power to enhance without providing an opportunity of being heard - CIT(A) disallowed expenditure on feeds and maintenance of livestock and the cost of purchase of livestock treating them as capital expenditure - HELD THAT - Admittedly in the present case CIT(A) has made addition under the separate head of income. Infact while passing the order the income directed to be determined by the ld.CIT(A) would be below the income assessed by the Assessing Officer in his assessment order. Thus there is no enhancement of income and therefore there was no occasion to follow the procedure as argued by the ld.AR. In fact in the paragraphs below we have adjudicated the issue whether the livestock is capital asset or not and we have held that the livestock is not a capital asset. As we have held that the livestock is not a capital asset therefore the expenditure claimed by the assessee cannot be capitalized. In view of the above the ground no.4 raised by the assessee is dismissed. Addition towards profit on sale of livestock - capital asset or not? - AO held that livestock is not a capital asset and the long term capital gain on sale of self breeded livestock is not covered by the provision of section 10 of the Act and therefore the assessee is not entitled to claim any exemption of this in the income of the assessee - whether the livestock is a capital asset or not? - HELD THAT - The nature of assets whether it is fixed asset like plant and machinery or stock-in-trade is required to be determined on the basis of the correct nature of the asset. Based on the correct nature of the asset the taxability of the transaction is required to be determined. In the present case the nature of the asset namely livestock is not a fixed asset as mentioned hereinabove as it is so defined by the Income Tax Act and therefore the finding of the ld.CIT(A) holding it to be a capital asset is contrary to law. As we have held that livestock is not a capital asset the next argument decided by the ld.CIT(A) of his order that the buffalo calves born in the shed has zero cost of acquisition. In our view as we have decided that livestock is not a capital asset and therefore there is no purpose to discuss whether what will be the cost of acquisition of newly born buffalo calves. As mentioned hereinabove the normal business principles as applicable for the purpose of determining the profit and loss of the business are required to be applied even for the purposes of computing the profit on sale of newly born buffalo calves and thereafter the income earned used to be taxed as business income . Having held that livestock is not a capital asset and is only a stock-in-trade the logical fallout of the above conclusion is that the income of the assessee is required to be determined by applying the principle as applicable for determining the profit and loss of the business and is to be taxed as business income. Further Assessee is not entitled to indexation on the cost of purchase of the livestock as there is no provision for grant of indexation of the livestock being not a capital asset. Therefore we reverse the finding of the ld.CIT(A) whereby he had wrongly held that livestock is a capital asset and the income of the assessee is to be determined on the basis of treating the livestock as capital asset and not as stock in trade. Computation of total income for amount being purchase of livestock charged to Profit and Loss Account - HELD THAT - Since the contention of the assessee is that the income has already been taken into account while computing the income of the assessee in the computation therefore it cannot be charged again in the profit and loss account on the face of it is required to be accepted. However in view of the finding given hereinabove that livestock is not a capital asset and the sale of it is required to be computed as business income therefore we deem it appropriate to remand this issue to the file of AO to verify the contention of the assessee and decide the issue afresh in the light of our finding given hereinabove. Short term capital gain - As sale and purchase of livestock is a business activity and is not subjected to determination of capital gain or loss under the head income from Capita Gain . Therefore the gain arising out of the sale of livestock during the year under consideration is required to be treated as business income only and accordingly is required to be taxed.

Summary

Issues Involved:
1. Disallowance of interest paid to Hyderabad Mutual Benefit Society (HMBS).
2. Enhancement of assessment without providing an opportunity of being heard.
3. Addition towards profit on sale of livestock.

Issue-wise Detailed Analysis:

Issue No. 1: Disallowance of Interest Paid to Hyderabad Mutual Benefit Society (HMBS)
The assessee claimed interest payments to HMBS as business expenditure, which was disallowed by the Assessing Officer (AO) on the grounds that the loan was not reflected in the balance sheet and as per the principles of mutuality applicable to co-operative societies, the interest paid by members on loans taken from the society is not deductible. The CIT(A) upheld this disallowance, noting that the interest was allegedly paid by one of the partners and not through banking channels. The Tribunal found that the assessee failed to provide sufficient evidence to contradict the AO's findings. The matter was remanded back to the CIT(A) with directions to verify the utilization of the loan for business purposes, the existence of common partners, and whether the interest payments were made through banking channels. The CIT(A) was also directed to call for a remand report from the AO and verify the records of HMBS.

Issue No. 2: Enhancement of Assessment Without Providing an Opportunity of Being Heard
The assessee contended that the CIT(A) made fresh additions without issuing a notice of enhancement, thereby violating the principles of natural justice. The CIT(A) disallowed expenditure on feeds and maintenance of livestock and the cost of purchase of livestock, treating them as capital expenditure. The Tribunal held that the CIT(A) did not enhance the income but merely directed the capitalization of certain expenditures. Since the livestock was held not to be a capital asset, the expenditure on feeds and maintenance was to be treated as revenue expenditure. The Tribunal dismissed the ground of enhancement without notice but allowed the expenditure on feeds and maintenance as revenue expenditure.

Issue No. 3: Addition Towards Profit on Sale of Livestock
The AO treated the profit on the sale of livestock as business income, disallowing the claim of capital gains and indexation benefits. The CIT(A) held that livestock is a capital asset and allowed the claim of capital gains, directing the AO to rework the gains. The Tribunal examined the statutory scheme under Section 43(3) of the Income Tax Act, which excludes livestock from the definition of "plant," thereby treating it as stock-in-trade. The Tribunal found that the assessee's reliance on earlier judgments was misplaced due to subsequent amendments to the Act. The Tribunal reversed the CIT(A)'s finding, holding livestock as stock-in-trade and not a capital asset, thereby treating the income from the sale of livestock as business income. The Tribunal also remanded the issue of the cost of purchase of livestock back to the AO for verification.

Conclusion:
The Tribunal remanded the issue of disallowance of interest paid to HMBS back to the CIT(A) for further verification and allowed the assessee's appeal for statistical purposes. The Tribunal dismissed the ground of enhancement without notice but allowed the expenditure on feeds and maintenance as revenue expenditure. The Tribunal reversed the CIT(A)'s finding on the treatment of livestock as a capital asset, treating it as stock-in-trade and taxing the income from the sale of livestock as business income. The assessee's appeal for A.Y. 2012-13 was allowed for statistical purposes, the appeal for A.Y. 2013-14 was partly allowed for statistical purposes, and the Revenue's appeal for A.Y. 2013-14 was allowed.