2019 (7) TMI 1081 - AT - Income Tax

Disallowance u/s 14 A - non recording of dissatisfaction by AO - HELD THAT - In the present case the learned assessing officer has failed to record his satisfaction u/s 14 A of the income tax act that assessee has incurred any expenditure for the purpose of earning of the exempt income. It is mandatory for learned assessing officer to first record his satisfaction with reference to the books of accounts of the assessee that explanation of the assessee, that it has not incurred any expenditure for the purpose of earning of the exempt income of the income or Quantified disallowance by assessee under the provisions of section 14 A of the income tax act is incorrect. - Decided in favour of assessee Loss on sale of securities - allowable business loss - HELD THAT - It is interesting to note that in assessment year 2004 05 the assessee has earned profit on sale of the securities which has been assessed by the learned AO u/s 143 (3) as business income. However, during the year the learned assessing officer has changed his stand when assessee has incurred loss and tried to justify it as shortterm capital loss incurred by the assessee. The learned departmental representative could not point out any distinction between the transactions entered into by the assessee in assessment year 2004 05 and transactions entered into by the assessee in assessment year 2005 06. In view of the above facts, it is a clear-cut case of the change of opinion by the learned assessing officer only to extract the higher tax. The assessing officer is blowing hot and cold on the same set of facts in two different assessment years to cough up more taxes from the assessee. This tactic of the learned AO deserves to be condemned. The learned departmental representative also could not point out any infirmity in the order of CIT A in he stated that assessee has maintained two portfolios whereas the life insurance investment is held to be an investment portfolio and other securities are held to be the trading assets. In view of this, we dismiss ground number 3 of the appeal of AO. Disallowance u/s 35D in respect of preliminary expense - HELD THAT - This issue is squarely covered in favour of the assessee by the decision of the honourable Supreme Court in case of Shashun chemicals and drugs Ltd 2016 (9) TMI 1199 - SUPREME COURT . Admittedly this is not the 1st year of the claim u/s 35D out of block of 5 years. The honourable Supreme Court in para number 13 of the decision has held that in any case, it warrants reputation that in the instant case under the very same provisions benefit is allowed for the first two assessment years and, therefore, it could not have been denied in the subsequent block period. The issue before the honourable Supreme Court was also with respect to the benefit of section 35D of the act. In view of this, we dismiss ground number 4 of the appeal of the learned assessing officer. Disallowance of prior period expenses - HELD THAT - The above issue is also squarely covered against the assessee in the decision of Saurashtra cement and chemical industries Ltd vs Commissioner of income tax 1994 (10) TMI 30 - GUJARAT HIGH COURT - In the present case also the bills for the expenditure was received in the current financial year relating to the earlier financial year and therefore such expenditure has crystallized during this year and therefore they are allowable. After considering the argument of the rival parties, we do not find any infirmity in the order of the learned CIT A in deleting the above disallowance. Therefore, ground number 5 is dismissed. Addition of interest expenditure - existence of business or not - HELD THAT - CIT-A has examined the allowability of expenditure under the head profits and gains of business or profession as well as under the other head of income from other sources , and in both the heads, he held that the expenditure is allowable to the assessee. On analysis of the annual accounts of the assessee and further when deduction u/s 35D of the income tax act under the head profits and gains of the business has been allowed to the assessee as per the decision of the honourable Supreme Court, it cannot be said that assessee does not have any business, therefore, the interest expenditure incurred by the assessee is allowable as deduction under both the heads. In AY 2005-06, we have also held that assessee s loss of sales of securities is chargeable to tax under the head business income and ld AO himself has accepted in AY 2004-05 that profit earned by the assessee on sale of securities is business income of the appellant, now it cannot be said that assessee does not have any business in this year. The learned DR could not point out any infirmity in the order of the learned CIT(A) - dismiss ground of the appeal of revenue

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of loss on sale of securities.
3. Disallowance of preliminary expenses under Section 35D.
4. Disallowance of prior period expenses.
5. Disallowance of interest expenses.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The revenue contested the deletion of a disallowance of ?8,403 made under Section 14A. The Assessing Officer (AO) had proportionately disallowed expenses related to earning dividend income, which is exempt from tax. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, noting that no specific expenditure was directly attributable to the earning of the dividend income. The Tribunal upheld the CIT(A)'s decision, emphasizing the absence of the AO’s satisfaction regarding the incurrence of such expenses by the assessee.

2. Treatment of Loss on Sale of Securities:
The AO treated the loss on sale of securities as a capital loss, not deductible from business income, arguing that the securities were shown as investments, not stock-in-trade. The CIT(A) reversed this, treating the loss as a business loss, noting the assessee’s consistent treatment of such transactions as business income in prior years. The Tribunal agreed, highlighting the principle of consistency and condemning the AO's change of stance only when it was beneficial to the revenue.

3. Disallowance of Preliminary Expenses under Section 35D:
For both assessment years, the AO disallowed the claim of preliminary expenses under Section 35D. The CIT(A) allowed the deduction, referencing the Supreme Court's decision in Shashun Chemicals and Drugs Ltd., which held that once a deduction under Section 35D is allowed in the initial years, it cannot be denied in subsequent years. The Tribunal upheld the CIT(A)’s decision, affirming the consistency of the claim across the block period.

4. Disallowance of Prior Period Expenses:
The AO disallowed ?11,425 as prior period expenses, which the CIT(A) deleted. The Tribunal upheld this deletion, referencing the Supreme Court’s decision in Saurashtra Cement and Chemical Industries Ltd., which allows such expenses if they crystallize in the current year.

5. Disallowance of Interest Expenses:
For the assessment year 2007-08, the AO disallowed interest expenses of ?1,01,54,708, arguing that the income was from other sources, not business income. The CIT(A) allowed the deduction, stating that the interest expenses were related to borrowed funds used in the business. Alternatively, he held that the expenses were deductible under Section 57 if treated as income from other sources. The Tribunal upheld the CIT(A)’s decision, noting the consistency in the assessee’s treatment of such expenses and the AO’s acceptance of similar claims in earlier years.

Conclusion:
The Tribunal dismissed the appeals for both assessment years, upholding the CIT(A)’s decisions on all grounds. The judgments emphasized principles of consistency, proper attribution of expenses, and adherence to established legal precedents.

← Previous Next →