2013 (9) TMI 262 - AT - Income Tax

Tribunal partially allows appeal, directs re-examination of certain claims. Stock valuation, prior expenses disallowed.

TRIUMPH INTERNATIONAL FINANCE INDIA LTD Versus DEPUTY COMMISSIONER OF INCOME TAX

The Tribunal partly allowed the appeal, directing the AO to re-examine and allow certain claims related to carry forward loss from trading in shares, bad ... Presumption of continuity of business, when external restriction has been put on carrying of business - Issue of enhancing the income of the assessee by Rs.1,07,98,248/- by disallowing the carry forward loss of Rs.1,07,98,248/- on account of trading in shares and securities claimed by the assessee as the assessee has not carried any business activity during the year under consideration - Assessee’s registration as share broker was cancelled by SEBI and there was no purchase and sale of shares by the assessee from the previous year - There being no business activity in shares and securities form the year 2001 on account of cancellation of registration as share broker, loss arising from mere valuation of the opening stock of shares would not lead to the conclusion that the assessee was carrying on any such activity – Held that:- Reliance has been placed in the decision in the case of KNP securities P. Ltd [2009 (5) TMI 840 - ITAT MUMBAI] - Not doing business activity was not on account of assessee’s will but on account of forced circumstances; therefore, it cannot be said that the assessee has closed/discontinued us business activity its own. The establishments of the assessee were intact and they were to be maintained. Staff members were kept and salaries were paid to them Loans taken from various banks and others for the purpose of business activity in past were outstanding during the years under consideration; therefore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used for the reason that SEBI has passed an order barring the assessee not to do any business activity. Therefore, it cannot be said that the assessee could not use the BSE card its own which was ready to use – Assessee’s business has not come to an end. The meaning of discontinuation is explained in the Law Lexicon where “it implies a voluntary act and abandonment of possession followed by the actual possession of another, it implied that the person discontinuing has given up the lend and left it to the possessed by anyone choosing to come in - In the present case neither the business is discontinued on account of voluntary act of the assessee nor the same has put to stop its own. The business could not be done for the reason that SEBI has barred the assessee not to do any business activity till further order. The assessee was barred till further orders clearly mean that the assessee was not barred permanently - Expenses incurred by the assessee for the purpose of its business activity are allowable as the establishment was not scraped and the assessee was still hopeful to start its business activity - Reliance is again placed upon the judgment in the case of CIT vs Vellore Electric Corporation Ltd reported in [1998 (11) TMI 42 - MADRAS High Court] – Further, similar decision has been passed in the case of Sree Meenakshi Mill Ltd, in [1966 (9) TMI 34 - SUPREME Court] by Hon’ble Supreme Court – Decided in favor of Assessee. Loss on account of loss of shares - Held that:- the assessee has not produced any evidence either before the AO or before the Ld.CIT(A) as to the physical loss of the shares. Also, we find merit in the reasoning of the Ld.CIT(A) that if the shares are lost, the assessee could have obtained duplicate for the same. - Decided against the assessee. Prior period of expenses - mercantile system of accounting - Held that:- it is for the assessee to demonstrate that the liability has been incurred in the year under consideration. The Ld.AR’s argument that the prior period expenses to be allowed as set off against the prior period income, in our view, is not legally tenable. Also, as there is no material placed on record to show that there is any nexus that the expenses claimed are incurred for earning of the interest income in terms of section 57 of the Act - Decided against the assessee. Issues Involved:1. Enhancing the income by disallowing carry forward loss from trading in shares and securities.2. Disallowance of bad debt written off.3. Disallowance of written-off sundry advances.4. Disallowance of decrease in valuation of stock.5. Disallowance of prior period expenses.6. Taxation of interest income under the head 'income from other sources.'7. Disallowance under section 43B for delayed payment to ESIC.8. Disallowance of depreciation on electrical fittings.9. Direction to tax interest on fixed deposits and miscellaneous income under 'income from other sources.'10. Direction to tax dividend income.11. Charging of interest under section 234B.Detailed Analysis:1. Enhancing the income by disallowing carry forward loss from trading in shares and securities:The Tribunal adjudicated ground no. 9(a) first, which involved the disallowance of the carry forward loss of Rs.1,07,98,248/- on account of trading in shares and securities. The Tribunal noted that the assessee had not carried any business activity during the year due to the SEBI ban and cancellation of registration. However, the Tribunal referred to its own previous decisions in similar cases, where it was held that the business was carried on despite the SEBI ban. The Tribunal directed the AO to re-examine the facts and allow the claim if the facts were comparable, allowing ground no. 9(a) for statistical purposes.2. Disallowance of bad debt written off:The Tribunal addressed the disallowance of bad debt written off amounting to Rs.38,30,66,554/- and Rs.97,27,368/-. The Tribunal referred to its own previous decisions, including the Special Bench decision in the case of CIT Vs Shri Shreyas S Morarkhia, which allowed such claims for share brokers. The Tribunal allowed the third-party bad debts but remanded the issue of bad debts involving sister/associate concerns and the bad debt provision of Rs.97,27,368/- back to the AO for fresh examination, partly allowing this ground.3. Disallowance of written-off sundry advances:The Tribunal addressed the disallowance of Rs.15,25,996/- written off as bad loans given to franchisees. The Tribunal noted that the AO did not indicate whether the loans were given with a repayment condition. The Tribunal directed the AO to examine the relevant records and give a finding based on facts, allowing this ground for statistical purposes.4. Disallowance of decrease in valuation of stock:The Tribunal addressed the disallowance of Rs.1,85,498/- on account of the decrease in the valuation of stock due to the loss of 671 shares of Reliance Industries Ltd. The Tribunal upheld the disallowance, noting that the assessee did not produce evidence of the physical loss of shares and could have obtained duplicates, dismissing this ground.5. Disallowance of prior period expenses:The Tribunal addressed the disallowance of Rs.6,07,078/- debited as prior period expenses. The Tribunal upheld the disallowance, noting that the assessee did not demonstrate that the liability was incurred in the year under consideration and there was no nexus with the interest income under section 57 of the Act, dismissing this ground.6. Taxation of interest income under the head 'income from other sources':The Tribunal addressed the direction to tax Rs.19,37,832/- as income from other sources. The Tribunal noted that there was no evidence that the FDRs were kept for business purposes. The Tribunal remanded the issue back to the AO to verify the nature, source, and purpose of the FDRs, allowing this ground for statistical purposes.7. Disallowance under section 43B for delayed payment to ESIC:The Tribunal addressed the disallowance of Rs.2,058/- for delayed payment to ESIC. The Tribunal noted that the payment was made before filing the return of income and allowed the claim based on the principle laid down by the Supreme Court in Vinay Cement, allowing this ground.8. Disallowance of depreciation on electrical fittings:The Tribunal addressed the disallowance of depreciation on electrical fittings restricted to 15%. The Tribunal referred to its own previous decision in the assessee's case, which allowed depreciation as claimed by the assessee, allowing this ground.9. Direction to tax interest on fixed deposits and miscellaneous income under 'income from other sources':The Tribunal addressed the direction to tax Rs.1,95,74,632/- and Rs.3,01,450/- under the head 'income from other sources.' The Tribunal remanded the issue back to the AO to verify the nature, source, and purpose of the investments, allowing this ground for statistical purposes.10. Direction to tax dividend income:The Tribunal addressed the direction to tax dividend income of Rs.10,799/-. The Tribunal noted that dividend income is exempt under section 10(34) of the Act and set aside the direction to tax the same, allowing this ground.11. Charging of interest under section 234B:The Tribunal noted that this issue is consequential and premature, hence did not adjudicate this ground.Conclusion:The appeal filed by the assessee was partly allowed, with several issues remanded back to the AO for fresh examination and verification.