2017 (12) TMI 576 - AT - Income Tax

Tribunal ruling: Capital gain classified short-term, interest disallowed on loans, admin expenses allowed

Matoshree Realtors Versus JCIT, Range-18 (3) And ITO, Wd. 21 (2) (2), Mumbai

The Tribunal classified the capital gain as short-term, disallowed interest expenditure on loans taken against fixed deposits, and allowed administrative ... Gain from relinquishment of booking rights in the project - LTCG OR STCG - holding period of the asset - to be reckoned from the date of MOU or offer letter - Held that:- In the offer letter, except area to be purchased and rate agreed upon, no other terms and conditions are mentioned. The acceptance letter issued by Kohinoor Projects Pvt Ltd, one of the consortium partners, simply confirms the arrangement as stated in the offer letter of the assessee subject to receipt of payment on stipulated date. Except these two simple facts, the offer letter and acceptance letter do not contain anything about the description of property, terms and conditions of agreement. MOU is a valid document conferring title and interest in the property in favour of the assessee, which happened on 05-10- 3007, but not on 25-06-2005. - even if date of first payment is considered for the purpose of reckoning holding period, the first payment was made on 19-7-2005 and if that date is considered, holding period of asset is still less than 36 months. Therefore, we are of the view that the assessee has got valid right over property on 05-10-2007, but not on 25-06-2005 and hence, the A.O. was right is treating surplus from surrender of booking right under the head short term capital gain. The CIT(A), without appreciating facts, held that the impugned asset is long term capital asset. Disallowance of interest paid on loan taken against security of fixed deposit - Held that:- Admittedly, in this case, the assessee is involved in the business of property management consultancy. The assessee has kept surplus funds in bank for a short period. Therefore, the interest income from fixed deposit is assessable under the head, ‘Income from other sources’. Though, the assessee claims to have paid interest to bank for loan taken against security of fixed deposit, loan proceeds have been utilized for advancing interest free loans to sister concerns. Therefore, the assessee is not eligible for deduction towards interest paid on loan against interest earned from fixed deposit. In this case, the assessee has paid interest to the bank for loan borrowed against security of fixed deposit. Admittedly, such loan has been utilized for advancing interest free advances to sister concerns and associates. This fact has been admitted by the assessee before the lower authorities. Though the assessee claims to have advanced loans to sister concerns out of commercial expediency failed to prove any commercial expediency in advancing loans to sister concerns. Therefore, we are of the view that the AO was right in denying netting off of interest paid to bank for loan taken against security on fixed deposit against interest earned from fixed deposit from the same bank. - Decided against assessee Set off of interest received from loans and advances against interest earned from fixed deposit - Held that:- We find force in the arguments of the assessee for the reason that if at all any interest is charged on loans and advances from the parties and the same is part of receipts of the assessee for the relevant financial year, then the same needs to be set off against interest paid to the bank on loan borrowed against security deposit, if there is a direct nexus between loans borrowed from bank and loans and advances to other parties. Since, the assessee has raised the issue for the first time, and the lower authorities did not have an occasion to examine the claim of the assessee, we deem it appropriate to set aside the issue to the file of the AO for further verification of facts in the light of the claim of the assessee. In case, the claim of the assessee is found to be correct, then the AO is directed to allow set off of interest earned from loans against interest paid to bank for loan taken against security of fixed deposit. Administrative and other expenses disallowance - Held that:- The assessee has explained that all expenditure are in the nature of general administrative and other overhead expenses which are necessarily to be incurred for keeping corporate entity of the assessee, whether or not any income is generated out of business activity. Therefore, we are of the view that the CIT(A) was right in directing the AO to allow deduction towards expenditure. Issues Involved:1. Classification of capital gain as Long Term or Short Term.2. Disallowance of interest paid on loans taken against fixed deposits.3. Allowance of administrative and other expenses when no business activity is conducted.Issue-Wise Analysis:1. Classification of Capital Gain as Long Term or Short Term:- Facts: The assessee, a partnership firm, declared long-term capital gain from the surrender of booking rights in a property. The AO reclassified it as short-term capital gain, arguing that the right was acquired on 05-10-2007 with the signing of an MOU, not on 25-06-2005, as claimed by the assessee.- Arguments: The assessee argued that the right was acquired on 25-06-2005 when the offer to purchase was accepted by the seller. The AO contended that the right was acquired on 05-10-2007 when a formal MOU was signed.- CIT(A) Decision: The CIT(A) held that the right was acquired on 25-06-2005, as the letter of offer and its acceptance constituted a valid contract, thus making the gain long-term.- Tribunal Decision: The Tribunal reversed the CIT(A)'s decision, holding that the right was acquired on 05-10-2007, as the letter from 25-06-2005 was a self-serving document without legal sanctity. The Tribunal concluded that the gain should be classified as short-term.2. Disallowance of Interest Paid on Loans Taken Against Fixed Deposits:- Facts: The assessee claimed interest expenditure on loans taken against fixed deposits, which were used to advance interest-free loans to sister concerns.- Arguments: The assessee argued that the interest expenditure should be allowed as it was incurred for business purposes. The AO disallowed the expenditure, stating that the interest income from fixed deposits should be taxed under 'Income from other sources,' and the interest paid on loans could not be netted off.- CIT(A) Decision: The CIT(A) upheld the AO's decision, stating that there was no commercial expediency in advancing interest-free loans to sister concerns.- Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, agreeing that the interest expenditure could not be netted off against interest income from fixed deposits as the loans were used for non-business purposes.3. Allowance of Administrative and Other Expenses When No Business Activity is Conducted:- Facts: The AO disallowed administrative and other expenses claimed by the assessee, stating that no business activity was conducted during the relevant financial year.- Arguments: The assessee argued that the expenses were necessary to maintain the corporate status and infrastructure, even if no business activity was conducted.- CIT(A) Decision: The CIT(A) allowed the expenses, citing judicial precedents that mere inactivity does not mean the business has ceased, and necessary expenses to maintain the business infrastructure should be allowed.- Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were necessary to maintain the business infrastructure and should be allowed.Conclusion:- The Tribunal concluded that the capital gain should be classified as short-term, disallowed the interest expenditure on loans taken against fixed deposits, and allowed the administrative and other expenses necessary to maintain the business infrastructure.