2024 (9) TMI 448 - AT - Income Tax

Disallowance of loss suffered by the appellant on genuine share trading and direct expenses incurred in respect of the said trading - HELD THAT - Reasoning given by AO in the Assessment Order are in the nature of doubts and suspicion and the opinion of the AO as to how such transactions are normally structured. We are inclined to accept the contentions that a bonafide business arrangement between the sister concerns for which an agreement was signed between the parties, which agreement has not been treated as a shell or bogus even by the AO or the CIT(A), does not convert the genuine transaction into bogus transaction as has been done by authorities below. It is not the case of the AO or CIT(A) that losses have not been incurred. On the contrary losses incurred by SGS Infratech Ltd. have been assessed. Only such part of losses, which SGS Infratech Ltd. incurred on behalf of assessee and recovered from assessee have been added in the hands of assessee by holding that assessee should have opened a demat account in its own name in spite of the fact that based on an agreement between the parties. Transactions of sale and purchase of shares were recorded in the regular books of accounts on day today basis. Such books of accounts are audited and accepted by the Department both in SGS Infratech Ltd. as well as assessee. On these facts, the views of the AO or CIT(A) cannot be accepted and are reversed. Addition was made by the AO without any sound legal basis and the facts supported the case of the assessee. The additions made are hereby deleted. Disallowance on account of various expenses - Disallowance is that the transaction of sale and purchase of shares trading business was held to be bogus by the learned AO - HELD THAT - Since we have already held that the arrangement of sale and purchase of shares is not bogus and therefore we have no hesitation in allowing this ground of appeal to the assessee, the addition is hereby directed to be deleted. Addition on account of income of house property - HELD THAT - We are of the opinion that for the purposes of computing the income from house property u/s 22 of the Income Tax Act, the ALV is required to be computed at per section 23. Section 23 is a deeming provision and taxes are required to be paid by an assessee if it is found to be the owner of such property. Admittedly, the assessee is owner of such property although for the part of the year. The provisions of section 23(2) have two sub-clauses (a) and (b). Admittedly clause (b) of section 23(2) is not attracted on the facts of the assessee s case. As far as clause (a) is concerned, the same can be invoked only if the assessee as an owner is in occupancy of such property for his own residence. It is not the case of the assessee that the property was kept for its own residence and the assessee claims that the same was held for sale. Property held for sale cannot be treated as occupied for one s own residence. Upon these facts and upon the aforesaid interpretation of provisions of law on this issue, we are of the opinion that no interference in the order of learned CIT(A) is called for and the order of CIT(A) on this issue is upheld and addition is confirmed.

Summary

Issues Involved:
1. Disallowance of loss on share trading and related expenses.
2. Disallowance of business expenses.
3. Addition of Annual Lettable Value (ALV) of a property.

Detailed Analysis:

1. Disallowance of Loss on Share Trading and Related Expenses:
The first issue pertains to the disallowance of a loss of Rs. 1,47,17,633/- and direct expenses of Rs. 8,77,743/- incurred on share trading. The Assessing Officer (AO) and the CIT(A) disallowed these amounts, alleging the transactions were bogus. The AO noted discrepancies such as the absence of a demat account in the assessee's name and the lack of one-to-one correlation between share transactions and bank statements. The AO also referenced the judgment of McDowell & Co Ltd. Vs CTO 154 ITR 148 (SC) to support the disallowance.

The assessee contended that the transactions were genuine, conducted through the demat account of an associate company, SGS Infratech Ltd., due to administrative reasons. The assessee provided audited financial statements and an agreement with SGS Infratech Ltd., which stipulated a 10% profit share as remuneration. The assessee argued that the AO's suspicions were unfounded and that the transactions were recorded daily in audited books of accounts.

The Tribunal accepted the assessee's contentions, noting that the transactions were genuine and recorded in both the assessee's and SGS Infratech Ltd.'s audited books. The Tribunal found that the AO's reasons were based on doubts and suspicions rather than concrete evidence. Consequently, the Tribunal deleted the disallowance of Rs. 1,47,17,633/- and Rs. 8,77,743/-.

2. Disallowance of Business Expenses:
The second issue involved the disallowance of Rs. 1,04,16,353/- in business expenses. The AO disallowed these expenses, considering the share trading transactions as bogus and treating the expenses as pre-operative. The CIT(A) allowed partial relief but upheld the disallowance of the remaining expenses.

The assessee argued that the expenses were incurred for business purposes, including directors' remuneration, legal and professional charges, and employee travel expenses. The assessee emphasized that disallowing directors' remuneration would result in double taxation, as the remuneration was already taxed in the directors' hands.

The Tribunal found that the AO's disallowance was primarily based on the assumption that the share trading transactions were bogus. Since the Tribunal had already held that the share trading transactions were genuine, it allowed the appeal and directed the deletion of the disallowance of Rs. 1,04,16,353/-.

3. Addition of Annual Lettable Value (ALV) of a Property:
The third issue concerned the addition of Rs. 1,17,200/- on account of the ALV of a property. The AO computed the ALV based on the fair market rent, while the CIT(A) restricted the addition to Rs. 1,17,200/-. The assessee argued that the property was held for resale and was sold during the year, thus no rental income should be imputed. The assessee also cited Section 23(2) of the Income Tax Act, which allows for the annual value of a self-occupied property to be taken as nil.

The Tribunal noted that Section 23(2) applies only if the property is occupied by the owner for their own residence. Since the property was held for sale and not for the owner's residence, the Tribunal upheld the CIT(A)'s addition of Rs. 1,17,200/-.

Conclusion:
The Tribunal partly allowed the appeal, deleting the disallowances related to share trading losses and business expenses, while upholding the addition related to the ALV of the property. The order was pronounced on 14th February 2024.