2023 (3) TMI 601 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on Revenue's appeals citing Rule 46A, Section 145(3), and Section 43(5).

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decisions on various grounds, including the alleged violation of Rule 46A, ... Rejection of books of accounts - necessity to point specific defects pointed out by the Assessing officer - HELD THAT:- It is admitted fact that the appellant had maintained books of accounts of the business carried out by him and the same were audited by a CA and the tax audit report along with audited accounts was placed before the AO in the assessment proceedings, but no specific defect was pointed out in the books of accounts. Merely because the appellant did not submit separate trading and profit and loss account for purchase and sale of edible oil and pesticides, it cannot be said to be specific defect for rejecting the books of accounts and the case of the assessee is covered by the decision in the case of CIT vs. Smt. Salochana Bhatia [2011 (5) TMI 838 - PUNJAB AND HARYANA HIGH COURT] and in the case of CIT vs. Om overseas [2008 (3) TMI 44 - HIGH COURT PUNJAB AND HARYANA] In view of the matter, we hold that the rejection of books of account is without any basis. Since, there have been no specific defects pointed out by the Assessing officer and, as such, the whole basis of rejection of books of account is on presumptions, conjectures and surmises and, thus, the Ld. CIT (A) has rightly held that the rejection of books of accounts u/s 145(3) of the Act is not liable to be rejected and thus, in our view, the rejection of books of account in such manner is unsustainable. This ground of revenue is rejected. Speculative transaction and set off of business loss - We find no infirmity or perversity in the finding of the Ld. CIT(A) in holding that the transactions of trading in edible oil by the appellant are not speculative in nature within the meaning of section 43(5) of the Act and therefore, the business loss incurred by the appellant is eligible for set off against other business income in terms of the provisions of section 71(1) of the Act. Thus, the grounds on the issue of speculative transaction and set off of business loss is rejected. Interest on FDR pledged with bank for foreign letter of credit - We hold that the goods imported by the assessee are backed up with LC [letter of credit] and that FDR made by it was not surplus FDR but as per bank’s term and hence, the interest from these fixed deposits which were inextricably linked to the business of the assessee would taxed as business income and not as income from other sources. Accordingly, the department ground that interest earned on FDRs kept in bank as margin money for obtaining LOC and bank security for high Sea Business Transaction to be income from other sources as against business income are rejected. So far as the interest from parties is concerned, the same cannot be said to be also linked to the business of the assessee. Even otherwise, since there was current year loss in the business of edible oil, the loss is liable to be adjusted against the business income derived from this year and for this reason, the Ld AR has no objection to our view that the interest from the parties would be charged to tax under the head Income from other sources. Issues Involved:1. Alleged violation of Rule 46A of the ITAT Rules, 1963.2. Justification for invoking provisions of Section 145(3) of the Income Tax Act.3. Classification of transactions as speculative under Section 43(5) of the Income Tax Act.4. Nexus between interest income and business activities.5. Classification of interest income from FDRs and other sources.Issue-wise Detailed Analysis:1. Alleged Violation of Rule 46A of the ITAT Rules, 1963:The Revenue contended that the CIT(A) admitted additional evidence in violation of Rule 46A. The CIT(A) based its findings on bills of entry as evidence for physical delivery of goods, which were already submitted during assessment proceedings. The Tribunal found the Revenue's claim factually incorrect, stating that no additional evidence was admitted in violation of Rule 46A. Hence, this ground was dismissed.2. Justification for Invoking Provisions of Section 145(3) of the Income Tax Act:The AO invoked Section 145(3) to reject the books of accounts, citing the assessee's failure to submit separate trading and profit and loss accounts for different business activities. The CIT(A) observed that the books were audited and no specific defects were pointed out by the AO. The Tribunal upheld the CIT(A)'s decision, stating that rejection of books without specific defects is unsustainable. This ground of revenue was rejected.3. Classification of Transactions as Speculative under Section 43(5) of the Income Tax Act:The AO classified transactions involving the sale and purchase of oil as speculative, as they allegedly did not involve actual delivery of goods. The CIT(A) distinguished the cited Supreme Court cases, noting that in the assessee's case, physical delivery occurred. The Tribunal agreed with the CIT(A), stating that the transactions were not speculative as they involved actual delivery, thus eligible for set-off against other income under Section 71(1). This ground was rejected.4. Nexus Between Interest Income and Business Activities:The AO classified interest income from FDRs and loans as 'Income from other sources,' arguing no nexus with business activities. The CIT(A) held that interest on FDRs pledged for obtaining LOCs was inextricably linked to the business, citing Delhi High Court's judgment in CIT vs. Koshika Telecom Ltd. The Tribunal upheld this view, distinguishing the cited cases and confirming the interest on FDRs as business income. However, interest from parties was classified under 'Income from other sources' as it lacked direct business linkage. This ground was partially accepted.5. Classification of Interest Income from FDRs and Other Sources:The CIT(A) allowed the set-off of interest income against business losses, distinguishing it from surplus FDRs. The Tribunal upheld this, noting the FDRs were not surplus but required for business operations. Interest from parties was classified as 'Income from other sources,' while interest on FDRs was treated as business income. This ground was partially accepted.Conclusion:The Tribunal dismissed the Revenue's appeals in ITA No. 56/Asr/2020 and I.T.A. No. 84/Asr/2020, upholding the CIT(A)'s decisions on all grounds except for the classification of interest from parties, which was treated as 'Income from other sources.' The order was pronounced on 23.02.2023.