2014 (6) TMI 734 - AT - Income Tax

Loss from business or profession - set off of business loss against the income shown under the head income from house property u/s. 71 - Conversion of the closing stock into capital asset Held that - The assessee had converted the stock in trade in to capital asset and the unsold flats and office premises became the capital asset of the assessee - Conversion was essentially sale of the assets, the assessee was carrying on business - conversion of stock in trade was not at market value - there was no business in the year - FAA was justified in holding that the assessee had carried out business during the year - business loss claimed by the assessee has rightly been allowed by the FAA - Decided against Revenue. Cessation u/s 41(1) of the Act - Refund of excess Bank processing charges Held that - Refund of bank processing charges and sundry balances returned back could not be taxed under the head income from other sources, that both the amounts should be assessed under the head income from business - income on cessation of liability pertain to section 41 of the Act, that assessee had rightly claimed the income under the head income from business/ profession - assessee was carrying on business during the year under appeal - both the items are to be treated as part of the business income of the assessee Decided against Revenue.

Summary

Issues:
1. Allowance of loss from business or profession.
2. Treatment of receipts in respect of refund of bank processing charges and cessation of liability under the head 'Income from Business'.

Analysis:

Issue 1: Allowance of loss from business or profession
The Assessing Officer (AO) challenged the order of the Commissioner of Income Tax (Appeals) directing the allowance of loss from business or profession. The AO argued that the conversion of unsold flats and office premises into capital assets did not qualify as business activity, generating no income. The AO contended that no business was carried out by the assessee during the relevant year or subsequent years. The AO disallowed the business loss claimed by the assessee. However, the First Appellate Tribunal (FAA) held that the conversion of stock into capital assets constituted business activity, justifying the allowance of the business loss. The FAA directed the AO to consider the market value of the stock at the time of conversion for correct business income calculation and allowed the set off of loss against income from house property.

Issue 2: Treatment of receipts under the head 'Income from Business'
The AO disallowed the receipts related to refund of bank processing charges and cessation of liability under the head 'Income from Business,' stating that no business activity was carried out by the assessee. The FAA disagreed, holding that both receipts should be assessed under the head 'Income from Business.' The FAA emphasized that since the assessee was engaged in business during the relevant year, the receipts were part of the business income. The Appellate Tribunal affirmed the FAA's decision, dismissing the AO's appeal.

In conclusion, the Appellate Tribunal upheld the FAA's decision, allowing the business loss and treating the receipts as part of the business income. The appeal filed by the AO was dismissed, and the orders were pronounced on 4th June 2014.