2017 (9) TMI 378 - AT - Income Tax

Tribunal allows Assessee's appeal on disallowance under section 14A and deletion of added amount on mutual funds sale

The Tribunal allowed the Assessee's appeal, deleting both the disallowance under section 14A and the addition related to the loss on the sale of mutual ... Disallowance under section 14A read with Rule 8D - characterisation of loss on sale of securities / mutual funds as capital loss or business loss - set-off of business loss against business income - application of binding precedentDisallowance under section 14A read with Rule 8D - application of binding precedent - Deletion of the addition of Rs. 37,500/- made by the AO under section 14A. - HELD THAT: - The Tribunal found that no exempt income was earned by the assessee in the year under consideration. The CIT(A) had relied on an earlier ITAT decision to sustain the disallowance, but that decision has been overruled by the Hon'ble High Court in Cheminvest Ltd. . Respectfully following the High Court precedent that where no exempt income is earned disallowance under section 14A is not warranted, the Tribunal deleted the addition made under section 14A.Addition under section 14A of Rs. 37,500/- deleted.Characterisation of loss on sale of securities / mutual funds as capital loss or business loss - set-off of business loss against business income - application of binding precedent - Deletion of the addition of Rs. 29,82,952/- made by the AO treating loss on sale of mutual funds as capital loss. - HELD THAT: - The Tribunal accepted the assessee's contention that it was engaged in trading in securities and that the mutual funds were held as stock-in-trade, so the loss on their sale arose in the normal course of business and is revenue in nature. The Tribunal applied the principle in Cocanada Radhaswami Bank Ltd. , holding that where the assessee's income comprises interest on securities and the transactions are business operations, such losses are allowable as business loss and may be set off against business income. The Tribunal also noted consistent treatment in earlier and later years without assessment adjustments, and therefore rejected the AO's treatment of the loss as capital in nature.Addition of Rs. 29,82,952/- treated as capital loss deleted; loss held to be business loss and allowable.Final Conclusion: Both additions appealed against were deleted: the section 14A disallowance was set aside following the High Court precedent holding no disallowance where no exempt income is earned, and the loss on sale of mutual funds was held to be a business loss (not capital) and therefore allowable; appeal allowed. Issues:1. Disallowance under section 14A of the Act.2. Treatment of loss on sale of mutual funds as capital loss or business loss.Issue 1: Disallowance under section 14A of the Act:The Assessee challenged the disallowance of Rs. 37,500 under section 14A. The Assessing Officer (AO) invoked section 14A due to the Assessee's investments in Mutual Funds, despite the Assessee claiming no tax-free income. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the disallowance. However, the Tribunal referred to the decision in the case of Cheminvest Ltd. vs. CIT [2015] 378 ITR 33 (Del), where it was ruled that disallowance under section 14A must be made even in the absence of exempt income. As the Assessee had no exempt income during the relevant year, the Tribunal deleted the disallowance.Issue 2: Treatment of loss on sale of mutual funds:The Assessee incurred a loss of Rs. 29,82,952 on the sale of Mutual Funds, claiming it as a business loss. The AO treated it as a capital loss, disallowing the claim. The Assessee argued that the loss was incurred in the normal course of business and should be treated as a business loss. The Tribunal noted that the Assessee's primary income source was interest, and the loss on the sale of Mutual Funds should be considered a business loss. Citing the judgment in CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC), the Tribunal allowed the Assessee's claim, emphasizing that the AO had not challenged similar claims in previous or subsequent years. Therefore, the Tribunal deleted the addition of Rs. 29,82,952, allowing the Assessee's appeal.In conclusion, the Tribunal allowed the Assessee's appeal, deleting both the disallowance under section 14A and the addition related to the loss on the sale of mutual funds.