2017 (1) TMI 622 - AT - Income Tax

Treatment to loss - CIT-A justified in treating the loss as business loss as against the speculation loss treated by the ld AO - Held that - Respectfully following the judicial precedents relied upon hereinabove Wanchoo Committee report of December 1971 and our findings given hereinabove we hold that the amendment brought in by the Finance Act 2014 should be construed as curative in nature and hence to be given retrospective applicability. It is not in dispute that the principal business of the assessee in the instant case is trading in shares. If the amendment supra is given retrospective effect then the same would automatically fall under the exception provided in the Explanation to Section 73 of the Act and accordingly the loss incurred on delivery based share transactions should not be construed as speculation loss. In view of this we are not inclined to get into the other arguments advanced by the ld AR and ld DR on the merits of the case. Hence ground raised by the revenue in this regard is dismissed. Disallowance made u/s 43B - Held that - The issue involved only requires factual verification from the bank statement and the loan account of the assessee as to whether out of total settlement of dues made by the assessee whether the interest component had been duly paid or not. Based on this factual verification the ld AO is directed to decide the issue in accordance with law. Disallowance of interest - Held that - It is not in dispute that the entire details of amount of interest free funds paid to three companies were duly filed before the ld AO by the assessee. The ld CITA had given a categorical finding that no part of the borrowed funds were utilized for advancing interest free funds by the assessee. This fact has not been controverted by the revenue before us. Hence the primary test for disallowance of interest that borrowed funds have been diverted for non business purposes fails.It is well settled that when there are mixed funds (i.e both borrowed as well as own funds) and when the own funds are several times more than the borrowed funds and interest free advances then it should be presumed that the interest free funds were advanced by the assessee from its own funds. Reliance in this regard placed by the ld AR on the decision of in the case of CIT vs Britannia Industries Ltd reported in (2005 (6) TMI 19 - CALCUTTA High Court ) is very well founded and is directly on the point. Thus we hold that there is no justifiable reason to interfere with the order of the ld CITA in this regard. Disallowance of depreciation related to transferred assets - Addition on account of business profit - Held that - There was no surplus that was derived in any manner whatsoever by the assessee warranting chargeability to tax. In any case we are in complete agreement with the arguments of the ld AR that the transfer of assets by holding to subsidiary company would fall under the exemption clause provided in section 47(iv) of the Act and hence the same in any event would not be regarded as transfer within the meaning of section 2(47) of the Act. We find from the facts narrated above the assessee had only added the fixed assets pertaining to Ahimsaa Channel during the year under appeal including the capitalization of preoperative and preliminary expense relating to the channel and transferred the same at book values / cost to its subsidiary company. There is no profit element derived from it. Hence we hold that there is no case for making any addition towards excess depreciation or profit derived from excess of assets over liabilities. We find that the ld CIT-A had rightly granted relief by duly appreciating the facts of the case.

Summary

Issues Involved:
1. Treatment of share trading loss as business loss or speculation loss.
2. Disallowance under Section 43B of the Income Tax Act.
3. Disallowance of interest on borrowed capital.
4. Disallowance of depreciation related to transferred assets.
5. Addition on account of business profit from transferred assets.

Issue-wise Detailed Analysis:

1. Treatment of Share Trading Loss as Business Loss or Speculation Loss:
The assessee, a Public Limited Company, declared a gross loss from trading in shares amounting to Rs. 85,84,968/-. The Assessing Officer (AO) treated this as speculation loss under Explanation to Section 73 of the Income Tax Act, arguing that the company's main income was from business activities. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, stating that the provisions of Explanation to Section 73 were meant to curb tax avoidance through manipulation of share dealings within group companies, which was not the case here. The Tribunal upheld the CIT(A)'s decision, noting that the principal business of the assessee was trading in shares and the amendment to Explanation to Section 73 by Finance Act 2014, which clarified the exception for companies primarily trading in shares, should be applied retrospectively.

2. Disallowance under Section 43B:
The AO disallowed Rs. 7,25,444/- claimed as interest paid to Syndicate Bank under Section 43B, due to the absence of a relevant interest certificate from the bank. The CIT(A) deleted this disallowance, stating that the AO should have verified the payment directly from the bank if there were doubts. The Tribunal directed the AO to verify the payment from the bank statement and loan account of the assessee and decide the issue accordingly, allowing the revenue's appeal for statistical purposes.

3. Disallowance of Interest on Borrowed Capital:
The AO disallowed Rs. 14,05,745/- as interest on borrowed capital, alleging that the assessee had given interest-free loans and advances while paying interest on borrowed funds. The CIT(A) deleted this disallowance, finding that no part of the borrowed funds was used for interest-free advances and the assessee had sufficient own funds. The Tribunal upheld the CIT(A)'s decision, citing the principle that when own funds exceed borrowed funds, it should be presumed that interest-free advances were made from own funds, referencing the case of CIT vs Britannia Industries Ltd.

4. Disallowance of Depreciation Related to Transferred Assets:
The AO disallowed Rs. 15,05,244/- as depreciation on assets transferred to the subsidiary, arguing that the value of transferred assets was not deducted from the depreciation schedule. The CIT(A) deleted this disallowance, noting that the transfer was at book value without any profit and the assets were not included in the depreciation schedule. The Tribunal found no surplus derived from the transfer and upheld the CIT(A)'s decision, confirming that the transfer between holding and subsidiary companies falls under the exemption of Section 47(iv) of the Act.

5. Addition on Account of Business Profit from Transferred Assets:
The AO added Rs. 1,28,23,581/- as business profit from the transfer of preoperative expenses, treating it as income under Section 28. The CIT(A) deleted this addition, stating that the transfer was at book value without any profit. The Tribunal upheld the CIT(A)'s decision, confirming that there was no profit element in the transfer and the transaction falls under the exemption of Section 47(iv), thus not constituting a transfer under Section 2(47) of the Act.

Conclusion:
The appeal of the revenue in ITA No. 1531/Kol/2011 is partly allowed for statistical purposes, and the appeal in ITA No. 1532/Kol/2011 is dismissed. The Tribunal's order was pronounced on 05.10.2016.