2018 (11) TMI 779 - AT - Income Tax

Business loss set off against income from capital gains - proof of incurrence of loss during the course of business - assessee derived the income from house property and the income from capital gains on sale of property - Held that - To allow the set off business loss against the current years income, the assessee has to establish that she has incurred the loss during the course of business. AO as well as the CIT(A) have given finding that the borrowals were used for investment or for personal purposes but not for any business purposes. Further, the assessee has not furnished the details of withdrawals made from the current account of the partnership firm and matching utilisation of the funds with relevant statements of bank account. The assessee neither produced the details before the AO nor before the CIT(A) regarding the application of withdrawals made from the current account/capital account with tangible evidence such as relevant bank account copies etc. Assessee did not furnish the statement of affairs or the balance sheet from the date of first overdrawal till date to demonstrate the application of funds. No reason to differ with the finding given by the AO as well as the CIT(A) that the withdrawals made from capital account or current account with M/s ABC Engineering Works were mainly used for personal purposes and the funds were not used for any business purposes. Therefore, we hold that the AO has rightly disallowed the claim made by the assessee which was upheld by the CIT(A). - Decided against Assessee.

Summary

Issues:
Allowability of business loss against income from capital gains.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax(Appeals) for the assessment year 2012-13. The assessee, a partner in a firm, admitted a loss of Rs. 9,24,278 for the year. The Assessing Officer found that the assessee had withdrawn significant amounts from the partnership firm's current account for personal use, not related to business. The AO disallowed the business loss claimed by the assessee, holding that the interest and losses take the character of share income from the firm, which is exempt under section 10(2A) of the Income Tax Act. The AO recomputed the income, rejecting the set off of business loss.

The CIT(A) confirmed the AO's decision, stating that the interest on the debit balance in the capital account was not allowable deduction as the withdrawals were used for personal purposes. The CIT(A) observed that the purpose of charging interest was to reduce the total income with the intent to avoid or reduce tax liability. The Tribunal heard arguments from both sides. The assessee claimed that the interest paid on the debit balance was a business expenditure and the withdrawals were used for renovation of a property sold, making it eligible for set off against capital gains.

The Tribunal noted that the assessee did not carry on any business during the year. It was observed that the borrowings were used for personal purposes and not for business. The Tribunal found no evidence provided by the assessee to demonstrate that the funds were used for business purposes. As a result, the Tribunal upheld the decision of the lower authorities to disallow the claim for business loss. The Tribunal directed the AO to recompute the interest payable but dismissed the appeal, stating that the assessee was not entitled to claim set off interest from capital gains or income from the property.

In conclusion, the Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the assessee, emphasizing that the business loss claimed was not allowable against income from capital gains due to lack of evidence showing business use of the funds.