2017 (4) TMI 813 - AT - Income Tax

Disallowance of loss arising out of share transactions - Held that - There is no dispute with regard to the fact that the impugned shares form part of the stock in trade of the assessee. Even if the shares under consideration formed part of shares acquired during the stock scam period, yet the fact remains that the loss claimed by the assessee relates to valuation of closing stock and the loss has arisen on account of diminution in the value of stock only. Since the valuation of stock in trade has been done as per the accounting system followed by the assessee and since the value adopted is supported by stock exchange quotation, we are of the view that the same cannot be considered as non-genuine loss. Accordingly we are of the view that the impugned loss should be allowed while computing the income of the assessee. Accordingly, we set aside the order passed by the learned CIT(A) and direct the Assessing Officer to allow the loss Assessment of interest income - under the head Income from Other sources OR Income from Business - Held that - Since the assessee was held to be continuing its business activities and since these deposits have been made in connection trading activities of the assessee, the co-ordinate benches in assessee s own case for previous AYs have held that the interest income should be treated to incidental business income and accordingly directed the AO to assess the same as business income of the assessee. Assessment of Prior period income - Held that - The interest income should be in the respective years only, as the AO is not entitled to assess an item of income which does not belong to that year. Accordingly we direct the AO to exclude the income of other years and they may be assessed in the respective years in accordance with law. The TDS credit should also be restricted to the extent of relevant income assessed during the year under consideration and the remaining amount of TDS should be allowed credit in the respective years of assessment. The deduction of prior period expenses may also be considered in the respective years. We order accordingly. The order of Ld CIT(A) is modified accordingly. Disallowance of expenses - assessee did not carry on any business activities - Held that - As in the earlier paragraphs, by following the orders passed by coordinate benches, we have held that the assessee should be considered as carrying on business activities. Hence the expenditure claimed by the assessee should be allowed. Accordingly we set aside the order passed by Ld CIT(A) on this issue. Applicability of Explanation 73 to the assessee - Held that - In AY 2002-03 & 2003-04 the coordinate bench of Tribunal has held that the provisions of Explanation 73 would apply to the assessee in that year, since the interest income was directed to assessed as business income. In the instant year also, we have held that the interest income should be assessed as business income. However, the Ld A.R requested that this matter may be set aside to the file of the AO for examining the applicability of Explanation 73 to the assessee during the instant year. Hence the above said provisions would apply to the assessee as the assessee did not have income from other sources. However, if the assessee is able to demonstrate before the AO to his satisfaction that the provisions would not apply to the assessee, the AO may decide the issue in accordance with the law.

Issues:
1. Disallowance of loss arising from share transactions for A.Y. 2003-04.
2. Disallowance of loss arising from valuation of shares for A.Y. 2005-06.
3. Assessment of interest income under different heads.
4. Assessment of prior period income.
5. Disallowance of expenses.
6. Applicability of Explanation 73.

Issue 1: Disallowance of Loss for A.Y. 2003-04:
The appeal contested the disallowance of loss of ?12.27 lakhs from share transactions. The assessee, engaged in share broking and trading, claimed the loss due to the diminution in value of shares. The Assessing Officer disallowed the claim citing lack of proof of the loss's genuineness. The CIT(A) upheld the disallowance, stating insufficient details provided. The assessee argued consistent valuation methods and cited legal precedents supporting their claim. The Tribunal found the loss genuine, as it was based on the valuation of closing stock as per the consistent method followed by the assessee. The loss was allowed, setting aside the CIT(A)'s order.

Issue 2: Disallowance of Loss for A.Y. 2005-06:
The issue involved the disallowance of ?13.70 lakhs loss from the valuation of shares of Global Trust Bank Ltd. The assessee challenged the disallowance, citing cancellation of business license by SEBI. The Tribunal considered previous decisions and held the loss allowable, as the business was deemed to continue despite license cancellation. The loss was directed to be allowed, overturning the CIT(A)'s decision.

Issue 3: Assessment of Interest Income:
The contention revolved around assessing interest income of ?10.32 lakhs under 'Income from Other Sources' instead of 'Income from Business.' The Tribunal, following past decisions, treated the interest income as incidental business income due to deposits made for trading activities. The interest income was directed to be assessed as business income, contrary to the CIT(A)'s order.

Issue 4: Assessment of Prior Period Income:
The assessee accounted for interest income accrued in previous years during the current year under 'Prior period items.' The Tribunal directed the AO to assess income in respective years and allow TDS credit accordingly, modifying the CIT(A)'s order.

Issue 5: Disallowance of Expenses:
The CIT(A) disallowed expenses of ?8,24,409, citing lack of business activities. However, following prior decisions indicating the assessee's business continuation, the Tribunal allowed the expenditure claim, setting aside the CIT(A)'s decision.

Issue 6: Applicability of Explanation 73:
The Tribunal considered the applicability of Explanation 73 to the assessee due to interest income assessment as business income. The matter was remanded to the AO for examination, allowing the assessee to demonstrate non-applicability of the provision if possible.

In conclusion, the Tribunal allowed the assessee's appeal, addressing various issues related to loss disallowance, income assessment, prior period income, expenses, and legal provisions' applicability.

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