2018 (5) TMI 123 - AT - Income Tax

Tribunal validates reassessment, capital loss ruling upheld, deduction denial reversed.

The Tribunal upheld the validity of the reassessment proceedings under Section 147, dismissing the appeal. The loss on the sale of shares was treated as a ... Reopening of assessment - loss on sale of shares and also deduction u/s.36(1)(iii) - Held that:- It is possible that with due diligence of the Assessing Officer would have ascertained this fact at the time of assessment, if any also, but in view of the explanation (1) it does not mean that there was no default on the part of the assessee. The entire reassessment proceeding in this case is valid and therefore, the action of the Assessing Officer is upheld. The issue taken up by the AO in reopening of assessment viz. to consider loss on sale of shares and also deduction u/s.36(1)(iii) which was not at all considered in the course of original assessment, though it was completed u/s.143(3) and mere production of records by the assessee before the AO at the time of original assessment itself cannot be led to the conclusion that the AO had applied his mind wherein it requires due diligence and application of mind from the end of the AO.- Decided against assessee. Non-granting of loss on loss of shares by treating the same as capital loss - Held that:- investments in shares were not at all considered as stock in trade as the assessee was not dealing in shares. Once the shares are treated as investments, loss arising out of purchase and sale of shares is only a capital loss and it is not a business loss. In other words, assessee having carried on no business activity and treated the shares as investments from year to year, income or loss arising out of sale of such shares is to be considered as capital gain or capital loss. The share being a capital asset cannot acquire different character because of treatment accorded to it by the assessee in its return of income; contrary to the treatment given in the books of accounts. Hence, this ground of appeal of assessee stands rejected. Non-granting of deduction u/s.36(i)(viii) towards interest on deposit - Held that:- The interest income earned on deposit of surplus money would be assessable as income from other sources. If the interest income is from a fund, which has been kept as deposit from surplus capital, it would be assessable as income from other sources only. If the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources. In the present case since there is no evidence to show that the borrowed fund was used for making fixed deposit, it is to be considered as assessee has deposited its surplus fund as fixed deposit instead of keeping them idle, the income by way of interest should be treated as income from other sources. - Decided against assessee. Disallowance u/s.14A r.w.Rule 8D - Held that:- Since the investment does not yield any exempted income, there cannot be any applicability of sec.14A r.w. Rule 8D of the Income Tax Rules, 1962. Accordingly, this ground of the assessee in this appeal is allowed. Issues Involved:1. Validity of reopening of assessment under Section 147 of the Income Tax Act.2. Treatment of loss on sale of shares as capital loss or business loss.3. Non-granting of deduction under Section 36(1)(viii) towards interest on deposits.4. Disallowance under Section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Validity of Reopening of Assessment under Section 147:The first issue pertains to the validity of reopening the assessment for the year 2009-10. The assessee argued that the original assessment was completed under Section 143(3) and there was no new tangible material to justify reopening. The assessee cited the Supreme Court decision in *CIT vs. Kelvinator India Ltd.* to support their claim that the reopening was merely a change of opinion.The Tribunal held that the Assessing Officer (AO) had valid reasons to believe that income had escaped assessment, based on the material evidence available. The AO's action was justified under Section 147, as the reasons recorded indicated under-assessment of tax. The Tribunal emphasized that the AO's subjective satisfaction based on objective material evidence was sufficient to reopen the assessment. The Tribunal upheld the validity of the reassessment proceedings, dismissing the assessee's ground of appeal.2. Treatment of Loss on Sale of Shares:The second issue involved whether the loss on the sale of shares should be treated as a business loss or a capital loss. The assessee claimed the loss as a business loss, arguing that the shares were converted into stock-in-trade during the financial year 2008-09.The Tribunal noted that the assessee was engaged in the business of Home Finance and not in trading shares. The shares were held as investments, and the loss arising from their sale was to be considered a capital loss. The Tribunal concluded that the shares were capital assets and the loss was a capital loss, rejecting the assessee's claim of business loss.3. Non-Granting of Deduction under Section 36(1)(viii):The third issue was regarding the non-granting of deduction under Section 36(1)(viii) towards interest on deposits. The assessee argued that the interest earned on fixed deposits made during the time lag between borrowing and advancing housing loans should be set off against the interest expenditure.The Tribunal found no evidence to show that the borrowed funds were used for making fixed deposits. The interest income from the deposits was assessable as income from other sources, not eligible for deduction under Section 36(1)(viii). The Tribunal upheld the AO's and CIT(A)'s disallowance, rejecting the assessee's ground of appeal.4. Disallowance under Section 14A read with Rule 8D:The fourth issue was the disallowance under Section 14A read with Rule 8D for the assessment year 2012-13. The AO disallowed Rs. 43,82,057/- invoking these provisions. The assessee argued that no exempt income was earned during the relevant year, citing the jurisdictional High Court decision in *CIT vs. Chettinad Logistics (P.) Ltd.*The Tribunal agreed with the assessee, noting that Section 14A can only be triggered if the assessee seeks to offset expenditure against income that does not form part of the total income. Since no exempt income was earned, the disallowance under Section 14A read with Rule 8D was not applicable. The Tribunal allowed the assessee's ground of appeal.Conclusion:- The appeal regarding the validity of reopening the assessment was dismissed.- The claim of treating the loss on sale of shares as a business loss was rejected, confirming it as a capital loss.- The non-granting of deduction under Section 36(1)(viii) was upheld.- The disallowance under Section 14A read with Rule 8D was reversed, allowing the appeal.Order Pronounced:- ITA No.2732/Mds./2016 is dismissed.- ITA No.2733/Mds./2016 is allowed.