2004 (3) TMI 323 - AT - Income Tax

Partial Victory: Losses on Tax-Free Bond Sales Allowed; Interest and Admin Expenses Disallowed Due to Lack of Evidence.

The ITAT partially allowed the appeals, affirming the allowance of losses on the sale of tax-free bonds. However, it reinstated the disallowance of ... Disallowance of loss on sale of tax-free bonds - Disallowance of interest and administrative expenses related to tax-free bonds - Treatment of loss as speculation loss - HELD THAT:- The real objection of the IT authorities in the present case appears to be that the assessee is getting tax-free interest. But at the same time is also claiming loss on the sale of the tax-free bonds. But, as we have already noticed, the claim is in accordance with the judgment of the Supreme Court in Vijaya Bank's case[1990 (9) TMI 5 - SUPREME COURT], where the interest paid upto the date of purchase was considered to be part of the cost. Naturally, when the bond is sold, after the coupon date and after the interest is received, the price would have fallen and there is bound to be a loss. Howsoever strong one may feel, this position cannot be wished away and has to be accepted and full effect has to be given in the assessment. Thus, we are of the view that assessee is entitled to the allowance of the loss of Rs. 8,44,156 for the asst. yr. 1989-90 and Rs. 5,75,994 for the asst. yr. 1991-92. Accordingly, the first ground in the appeal filed by the Department for the asst. yr. 1989-90 is dismissed and the first ground filed by the assessee in the appeal for the asst. yr. 1991-92 is allowed. We have carefully considered the issue. Sec. 14A which has been introduced by the Finance Act, 2001, w.e.f. 1st April, 1962, says that for the purpose of computing the total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. There is no dispute that the income from bonds was not chargeable to income-tax and was exempt under s. 10. The expenditure incurred in relation to such income is, therefore, to be disallowed. This is what the AO has done. He has attributed a part of the financial and administrative expenses as expenditure incurred in relation to the tax-free income and has disallowed the same. In our view, this action of the AO is authorised by the section. Before us, though the learned counsel for the assessee contended that the amounts borrowed for interest were not used for the purchase of tax-free bonds, but was unable to furnish any details to show how the loans taken from M/s Bimal Gandhi, Hiten P. Dalal and Industrial Credit & Development Syndicate Ltd. were repaid. Though funds might have been provided by these persons without interest for the purpose of acquiring the tax-free bonds, in the absence of any details to show that the assessee did not use interest-bearing funds to repay the above loans, it must be taken that the AO was right in his view. Accordingly, we reverse the decision of the CIT(A) and restore the disallowance made by the AO. The ground is allowed. In the appeal by the assessee for the asst. yr. 1991-92, the only other ground is that the CIT(A) erred in treating the loss of Rs. 2,32,505 as speculation loss. This ground was not pressed at the time of hearing and is, therefore, dismissed. In the result, both the appeals are partly allowed. Issues Involved:1. Disallowance of loss on sale of tax-free bonds.2. Disallowance of interest and administrative expenses related to tax-free bonds.3. Treatment of loss as speculation loss.Summary:1. Disallowance of Loss on Sale of Tax-Free Bonds:The assessee, a company engaged in financial management activities, incurred a loss of Rs. 8,44,156 in the purchase and sale of tax-free bonds for the asst. yr. 1989-90 and Rs. 5,75,994 for the asst. yr. 1991-92. The AO disallowed these losses, arguing that the interest received on tax-free bonds should be adjusted against the loss, resulting in no exemption u/s 10. The CIT(A) accepted the assessee's contention, relying on the Supreme Court's judgment in Vijaya Bank Ltd. vs. Addl. CIT, which held that the entire consideration paid for the purchase of bonds, including accrued interest, is capital outlay. The Tribunal upheld the CIT(A)'s decision, stating that the genuineness of the transactions was not in question and that the assessee's actions were within the law, thus allowing the losses for both assessment years.2. Disallowance of Interest and Administrative Expenses Related to Tax-Free Bonds:The AO disallowed Rs. 3,88,162 and Rs. 5,675 as financial and administrative expenses, respectively, attributing them to the tax-free income from bonds. The CIT(A) deleted this disallowance, accepting the assessee's claim that the investments were directly financed by third parties and citing the Supreme Court's judgment in CIT vs. Indian Bank. However, the Tribunal reversed the CIT(A)'s decision, invoking s. 14A, which disallows expenditure related to tax-free income. The Tribunal found no evidence that the assessee did not use interest-bearing funds to repay the loans and restored the AO's disallowance.3. Treatment of Loss as Speculation Loss:For the asst. yr. 1991-92, the CIT(A) treated a loss of Rs. 2,32,505 as speculation loss. This ground was not pressed by the assessee during the hearing and was thus dismissed by the Tribunal.Conclusion:Both appeals were partly allowed, with the Tribunal upholding the allowance of losses on the sale of tax-free bonds but restoring the disallowance of interest and administrative expenses related to tax-free bonds. The treatment of loss as speculation loss was dismissed as it was not pressed.