2013 (10) TMI 1127 - AT - Income Tax

Tribunal rules on interest taxability vs. principal exclusion, partially allows income enhancement

Triumph Securities Ltd. Versus ACIT, Central Circle 40 Mumbai

The Tribunal upheld the taxability of interest amount under section 41(1) while excluding the principal amount from taxation. The enhancement of income ... Re-opening of assessment u/s 147 – Reasons to be given for re-opening u/s 148 – Held that:- As no previous assessment was framed nor any return of income was filed by the assessee, the AO has issued notice u/s 148 only asking the assessee to file its return of income, therefore, no any reason why the AO should have given any reason for reopening the assessment – Decided against the Assessee. Addition being amount credited to capital reserve on account of waiver of principal amount of loan allowed by Centurian Bank – Held that:- The statement of loan amount as exhibited clearly shows that the assessee has transferred the waiver to its capital reserves amount totaling to Rs.9,23,16,891/- - Settlement agreement between assessee and the bank does not specify the principal amount and the interest and other charges. However, the AO has given a very categorical finding by bifurcating the principal amount and the interest amount - CIT(A) has very correctly excluded the principal amount from the clutches of the provisions of section 41(1) of the Act and restricted rightly the interest part to be taxed u/s 41(1) of the Act – Decided against the Assessee. Depreciation on BSE card – Held that:- Claim of depreciation on BSE Card is disallowed as there is no business activity. Disallowance of expenditure as there is no business activity – Held that:- Reliance has been placed upon the judgment of Hon’ble Co-ordinate bench in the identical case of Classic Shares & Stock Broking Pvt. Ltd [2010 (11) TMI 716 - ITAT, Mumbai] – It is held relying upon the above case that assessee is carrying on the business activity – Decided in favor of Assessee. Issues:1. Validity of assessment order under section 143(3) read with section 148.2. Taxability of amount credited to capital reserve on account of waiver of principal amount of loan.3. Disallowance of interest amount under section 41(1) of the Income Tax Act.4. Enhancement of income due to disallowance of business loss and expenses.Issue 1: Validity of assessment order under section 143(3) read with section 148:The assessee challenged the validity of the assessment order under section 143(3) read with section 148, claiming that the AO did not provide reasons for reopening the assessment. The Tribunal held that as no previous assessment was made and no return was filed, the notice u/s 148 only required the assessee to file its return, hence no specific reasons were needed. The additional ground challenging the validity of the assessment order was dismissed.Issue 2: Taxability of amount credited to capital reserve on account of waiver of principal amount of loan:The AO added the amount credited to the capital reserve on account of the waiver of the principal amount of the loan to the assessee's income. The CIT(A) held that the principal amount written off was capital in nature and not taxable under section 41(1) of the Act. However, the waiver of interest was considered taxable under section 41(1) and was restricted. The Tribunal upheld the CIT(A)'s decision, dismissing the appeal on this ground.Issue 3: Disallowance of interest amount under section 41(1) of the Income Tax Act:The AO disallowed the interest amount written off by the bank, considering it as a benefit to the assessee. The CIT(A) upheld the disallowance of interest but excluded the principal amount from taxation under section 41(1). The Tribunal agreed with the CIT(A), holding that the interest amount was taxable under section 41(1) while the principal amount was not. The appeal on this ground was dismissed.Issue 4: Enhancement of income due to disallowance of business loss and expenses:The CIT(A) enhanced the income by disallowing the claimed business loss and expenses, stating there was no business activity. The Tribunal disagreed, citing a similar case involving a group concern where business activity was recognized despite adverse circumstances. The Tribunal reversed the CIT(A)'s decision, except for the disallowance of depreciation on a specific item. The appeal was partly allowed, setting aside the CIT(A)'s order on this issue.In conclusion, the Tribunal upheld the taxability of interest amount under section 41(1) while excluding the principal amount from taxation. The enhancement of income due to disallowance of business loss and expenses was partly allowed based on recognizing the existence of business activity.