2016 (10) TMI 589 - AT - Income Tax

Applicability of explanation to section 73 - whether the principal business of the assessee is granting of loan and advance? - Losses in speculation business - Held that - CIT(A) has concluded that the main business of the assessee was of granting of loans and advances. When 99% of assessee s income was derived from interest on loans and advances, therefore, merely because it was not registered as a NBFC, it could not be concluded that the principal business of the assessee was not of granting loans and advances. CIT(A) has also referred to item 5 of the memorandum of association, as per which, one of the main objects was to carry on the business of arranging, organizing, executing all kind of financial services and he has also referred to clause 16 of the incidental objects of memorandum of association, as noted earlier. In the backdrop of these factual findings, it cannot be said that assessee was not primarily in the business of granting of loans and advances. As the assessee s case was covered by the second exception to the Explanation to section 73 and consequently the addition made by the AO by treating the loss incurred by the assessee company as speculative loss was deleted. Therefore, do not find any reason to interfere with the finding of ld. CIT(A). - Decided in favour of assessee Addition u/s 14A - Held that - As total dividend income received by the assessee was ₹ 38/- and the same had been offered for taxation in the return of income. Therefore, there was no amount which could be subjected to disallowance u/s 14A. Ld. CIT(A) following the decision in the case of Joint Investment (P) Ltd. Vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT , gave a relief of ₹ 57,881/- as the disallowance u/s 14A could not exceed the exempt income. No reason to interfere with the finding of ld. CIT(A). - Decided in favour of assessee

Summary

Issues:
1. Interpretation of section 73 - Whether the loss claimed by the assessee can be treated as speculative loss.
2. Disallowance under section 14A - Whether the addition made by the AO is justified.

Analysis:

Issue 1: Interpretation of section 73
The primary issue in this case revolved around the interpretation of section 73 of the Income Tax Act, 1961, specifically whether the loss claimed by the assessee should be treated as speculative loss. The Assessing Officer (AO) treated the business loss claimed by the assessee as speculative loss under the Explanation to section 73. The assessee contended that its main business was granting loans and advances, supported by the fact that almost 99% of its total income comprised of interest income on loans and advances. The assessee argued that this placed it within the second exception to section 73, as it was primarily engaged in providing loans and advances. The ld. CIT(A) agreed with the assessee, noting that the principal business of the assessee was granting loans and advances, as evidenced by the balance sheet and profit and loss account. The ld. CIT(A) highlighted the significant income derived from interest on loans and advances, concluding that the assessee fell within the second exception to the Explanation to section 73. Consequently, the addition made by the AO was deleted.

Issue 2: Disallowance under section 14A
The second issue pertained to the disallowance under section 14A of the Income Tax Act, 1961. The assessee argued that since the total dividend income received was minimal and already offered for taxation, there was no amount eligible for disallowance under section 14A. The ld. CIT(A) relied on a previous decision and granted relief to the assessee by disallowing a reduced amount under section 14A, considering that the disallowance could not exceed the exempt income. Upon hearing both parties, the Tribunal found no reason to interfere with the ld. CIT(A)'s order, leading to the dismissal of this ground of appeal.

In conclusion, the Tribunal dismissed the departmental appeal, upholding the ld. CIT(A)'s decision regarding the treatment of the loss claimed by the assessee and the disallowance under section 14A. The judgment emphasized the importance of analyzing the nature of the assessee's business activities and income sources to determine the applicability of relevant provisions of the Income Tax Act.