2015 (8) TMI 79 - AT - Income Tax

Disallowance u/s 14A - Held that - By applying rule 8D, the AO had disallowed the entire business expenditure on the plea that same was incurred for the earning of exempt income, ignoring the fact that assessee was having taxable business income of ₹ 78,48,948/-, as compared to the tax free dividend of ₹ 8,95,949/-. The relevant assessment year is 2006-07, wherein rule 8D is not applicable but at the very same time, reasonable disallowance is warranted as per decision of Godrej & Boyce Mfg. Co. Ltd., 2010 (8) TMI 77 - BOMBAY HIGH COURT . Considering the amount of expenditure incurred for earning the total income main part of which was taxable i.e. ₹ 78.48 lakhs as against exempt income of ₹ 8.95 lakhs, we deem it appropriate to restrict the disallowance to the extent of ₹ 20,000/-. Decided partly in favour of assessee. Taxing of interest - business income OR income from other sources - Held that - If the assessee is engaged in the business of financing in addition to the business of trading in shares, the interest earned on loans and advances are liable to tax as business income. However, where the assessee is having interest income out of the surplus fund deployed with bank or party, the same is liable to be taxed as income from other sources. It is not in dispute that assessee has substantially earned interest income out of the financing business undertaken by it. Accordingly, we do not find any merit in the action of the lower authorities for treating the income earned in its financing business as income from other sources. Loss suffered on account of future and options transactions - whether has to be considered as business loss and not be considered as speculation loss as held by CIT(A) - Held that - CIT(A) has restored the matter back to the file of AO with a direction to decide the issue as per the order of the ITAT in assessee s own case for the assessment year 2003-04 and to allow the necessary carry forward loss as per law if the assessee is entitled for the same. We do not find any infirmity in the direction so given by the CIT(A).- Decided against revenue.

Summary

Issues involved:
1. Disallowance of business expenses under Section 14A r.w. Rule 8D of the Income Tax Act.
2. Treatment of interest income as Income from Other Sources instead of Business Income.
3. Recomputation of partners' remuneration.
4. Consideration of loss on future and options transactions as business loss.

Analysis:

1. Disallowance of Business Expenses:
The cross-appeals were filed by the assessee and Revenue against the order of CIT(A) for the assessment year 2006-07. The AO disallowed business expenses of Rs. 1,93,052 under Section 14A r.w.r.8D. The CIT(A) confirmed the disallowance. The assessee contended that the expenses were general in nature and not directly related to earning exempt income. Relying on judicial precedents, the assessee argued against the disallowance. The tribunal found that a reasonable disallowance was warranted, restricting it to Rs. 20,000 due to the taxable business income being significantly higher than the exempt income.

2. Treatment of Interest Income:
The AO treated the interest income of Rs. 22,55,865 as Income from Other Sources instead of Business Income. The assessee, engaged in financing business along with share trading, argued that interest earned on loans and advances should be taxed as business income. The tribunal agreed, stating that interest income from financing activities should be considered business income, not income from other sources. The AO was directed to recompute the partners' remuneration accordingly.

3. Recomputation of Partners' Remuneration:
The AO had reduced partners' remuneration by excluding interest income from business income, treating it as income from other sources. However, based on the tribunal's findings regarding interest income, the AO was directed to treat interest income as business income and adjust partners' remuneration accordingly.

4. Loss on Future and Options Transactions:
The Revenue challenged the CIT(A)'s decision to consider the loss on future and options transactions as business loss, not speculative loss. The AO initially disallowed the set-off of carried forward losses as speculative loss. However, the CIT(A) directed the AO to follow the ITAT's order in the assessee's own case for the assessment year 2003-04, treating future and options trading losses as business loss. The tribunal upheld the CIT(A)'s decision, allowing the carry forward loss based on the ITAT's order.

In conclusion, the tribunal partially allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each issue addressed in the judgment.