2011 (2) TMI 61 - AT - Income Tax

Tribunal Upholds Deletion of Notional Interest & Allows Set Off of Business Losses

Dy. CIT Versus Gagan Trading Co. Ltd.

The Tribunal dismissed the revenue's appeal challenging the deletion of notional interest taxed by the AO on deposits received for calculating income from ... 'Income from Business' or 'Income from other Sources' - dividend income - where the shares, on which dividend income is earned, if held as stock-in-trade, would be 'business income'. Otherwise it was assessed as 'Income from other Sources' - revenue has always been contending that merely holding of investments which yield dividend income can never be said to be carrying on ''Business' - AO has not disputed that the shares which yielding dividend income formed part of the stock in trade of the assessee - assessee entitled to the set off of its carried forward business loss against dividend income as claimed by it – Appeal allowed Issues Involved:1. Deletion of notional interest taxed by AO on deposits received while calculating income from house property.2. Disallowance of set off of brought forward losses against dividend income earned on shares held in stock-in-trade.Issue 1: Deletion of Notional Interest Taxed by AODetailed Analysis:The revenue's appeal challenges the CIT(A)'s decision to delete the notional interest taxed by the AO on deposits received while calculating income from house property. The assessee, the owner of commercial premises, had let out the property to several companies and collected a total of 85 crores as interest-free security deposits. The AO argued that the interest-free deposits should be considered as indirect rent for determining the annual value of the property and added notional interest at 18% to the actual rent received. This resulted in a significant increase in the income from house property.The CIT(A) deleted this addition, following the ITAT's decision in the assessee's own case for the assessment year 1999-2000, which held that notional interest on interest-free security deposits cannot be added to the actual rent received to determine the annual value for income from house property. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal, as the issue had already been decided in favor of the assessee in previous years.Issue 2: Disallowance of Set Off of Brought Forward LossesDetailed Analysis:The assessee's appeal concerns the disallowance of set off of brought forward business losses against dividend income earned on shares held as stock-in-trade. The assessee, engaged in the business of trading shares and earning dividend income, had carried forward business losses from the assessment year 1995-96. In the assessment year 2003-04, the assessee sought to set off these losses against dividend income assessed under the head 'Income from other sources.'The AO rejected the claim, arguing that due to amendments in the Act from the assessment year 1991-92, dividend income must be taxed under 'Income from other sources,' even if the shares are held as stock-in-trade. The CIT(A) upheld this view, stating that the prohibition under section 72 of the Act applied since the dividend income was assessed as 'Income from other sources.'The Tribunal, however, considered the assessee's reliance on the Supreme Court's decision in CIT v. Cocanada Radhaswmi Bank and the Calcutta High Court's decision in CIT v. New India Investment Corporation Ltd., which supported the set off of business losses against income from business activities, even if classified under different heads for tax purposes. The Tribunal found that the shares yielding dividend income were part of the trading assets, and thus, the dividend income was part of the business income. Consequently, the Tribunal allowed the set off of carried forward business losses against the dividend income, overturning the lower authorities' decisions.Conclusion:The Tribunal dismissed the revenue's appeal regarding the deletion of notional interest and allowed the assessee's appeal for the set off of brought forward business losses against dividend income. The order was pronounced in the open court on February 18, 2011.