2024 (11) TMI 156 - AT - Income Tax

Correct head of income - rental income earned by the assessee - Income from House Property v/s business income - HELD THAT - We notice that the assessee has treated the properties as its Investment only. Assessee has been declaring the rental income under the head Income from House Property only in the earlier years and the same has been accepted by the AO in the preceding years. In support of the same, the assessee has furnished in the paper book copies of assessment orders passed in AY 2015-16 and 2016-17. During the year under consideration, the AO has changed the head of income into Income from Business on the reasoning that the rent has been received under the name Licence fee and further, the objectives of the assessee included renting of properties. However, he has ignored the fact that the relevant properties have been shown as Investments by the assessee, meaning thereby, the assessee did not treat the relevant properties as its business assets. The nomenclature given to the rental receipts may not be relevant to determine the head of income. Hence both the reasoning given by the AO would fail. We notice that the Ld CIT(A) has also taken support of Principle of Consistency, which, in our view, cannot be faulted with in this case. CIT(A) was justified in holding that the rental income received by the assessee is assessable under the head Income from House Property . Treatment of loss incurred by the assessee in F O Transactions - normal business loss v/s speculation loss as held by the AO - as per CIT(A) F O transactions are treated as normal business transactions - HELD THAT - IT(A) has rendered his decision following the above said provisions, which by way of deeming fiction has excluded the eligible transactions in respect of trading in derivatives from the definition of speculative transaction . Before us, the Revenue could not show any other contrary provision to demonstrate that the reliance placed by Ld CIT(A) on the provisions of sec.43(5) of the Act was wrong. The finding of fact given by the Ld CIT(A) with regard to the noting made in the broker note was also not proved to be incorrect by the Revenue. Under these set of facts, we do not find any infirmity in the order passed by Ld CIT(A) on this issue. Disallowance u/s 14A - A.R submitted that the assessee did not earn any exempt income during the year under consideration from out of the investments held by it - HELD THAT - The fact would remain that the assessee did not earn any exempt income during the year under consideration. As held in the case of Kohinoor Project (P) Ltd 2020 (1) TMI 1161 - BOMBAY HIGH COURT that the disallowance u/s 14A is not required to be made if no exempt income is received or receivable during the relevant previous year. Since the decision rendered by Ld CIT(A) on this issue is contrary to the decision rendered by Hon ble jurisdictional Bombay High Court, the same cannot be sustained.

Summary

Issues:
1. Assessment of rental income under the correct head of income.
2. Treatment of loss from F & O transactions as speculation loss or normal business loss.
3. Disallowance made under section 14A of the Act.

Analysis:

1. Assessment of Rental Income:
The appeal involved a dispute regarding the correct assessment of rental income earned by the assessee. The Assessing Officer (AO) contended that the rental income should be assessed as business income due to the collection of rent under the name "Licence Fees" and the objectives of the assessee mentioning renting of properties. However, the assessee consistently treated the properties as investments and declared the income under the head "Income from House Property" in previous years. The Income Tax Appellate Tribunal (ITAT) observed that the nomenclature of receipts does not determine the head of income and supported the Principle of Consistency. The ITAT upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] that the rental income should be assessed under the head "Income from House Property."

2. Treatment of F & O Loss:
The Revenue raised an issue regarding the treatment of the loss incurred by the assessee in F & O transactions as speculation loss instead of normal business loss. The AO disallowed the set off claimed by the assessee against its business income, considering the transactions as speculative. However, the CIT(A) reversed this decision after verifying broker notes and referring to section 43(5) of the Act, which treats F & O transactions as normal business transactions. The ITAT upheld the CIT(A)'s decision, stating that the provisions of section 43(5) exclude eligible transactions in derivatives from being deemed speculative. The Revenue failed to demonstrate any contrary provision, leading the ITAT to find no fault in the CIT(A)'s order on this issue.

3. Disallowance under Section 14A:
The assessee filed a Cross objection regarding the disallowance made by the AO under section 14A of the Act. The AO disallowed a significant sum under Rule 8D of Income Tax Rules, even though the assessee did not earn any exempt income during the year. The ITAT referred to a decision by the Bombay High Court, stating that no disallowance under section 14A is necessary if no exempt income is earned. As the CIT(A)'s decision contradicted the High Court's ruling, the ITAT directed the AO to delete the addition made under section 14A of the Act.

In conclusion, the ITAT dismissed the Revenue's appeal and allowed the assessee's Cross objection, providing detailed reasoning for each issue and aligning the decisions with relevant legal provisions and precedents.