2014 (6) TMI 883 - AT - Income Tax

Disallowance u/s 14A - Expenditure earned in earning exempted income - Held that - disallowance of 10% made by the assessing authority is just and proper. Even if Rule 8D was not applicable for the impugned assessment year 2007-08(as argued by the assessee), it is within the competence of the Assessing Officer to invoke sec.14A and make a reasonable disallowance towards expenditure, depending on the facts and circumstances of the case. The assessee is a share broker. The assessee is earning dividend from investment made by it. Long term capital gains were derived from the shares held by the assessee. All these activities are carried on by the assessee in a composite manner. It is not the case of the assessee that the management of the assessee company and other personnel are not looking after the investment portfolio. All the activities are going on side by side. Therefore, a reasonable portion of the expenditure incurred for the management and administration of the business of the assessee is necessarily attributable to earning of exempted income. Therefore, the lower authorities are justified in making disallowance from the exempted income towards expenditure attributable to earning of that exempted income. Short term capital gains or business income - Held that - shares were sold by the assessee company, as investment and therefore, the surplus should be treated as short term capital gains - The assessee has maintained necessary particulars regarding the share investments such as, date of acquisition, consideration paid, details of sale, consideration received, distinctive numbers of the shares, the details of the parties etc. The fact that the assessee has earned dividend income and long term capital gains on sale of shares, supports the argument of the assessee that the surplus earned on sale of shares in the present case, could well be from sale of investment leading to short term capital gains. - When an assessee is also engaged in making investments of shares along with the regular business of share broking, this is the only way by which the assessee can prove its intention that the shares were held as investments. Here, in the present case, the assessee is already having investment in shares as established by the fact of earning dividend income and long term capital gains on sale of shares. When all these facts are taken into consideration, we find that there is no reason for the Assessing Officer to treat the short term capital gains as business income of the assessee. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance under sec.14A for expenditure related to earning exempted income.
2. Treatment of short term capital gains as business income.

Issue 1: Disallowance under sec.14A for expenditure related to earning exempted income:

The appeal pertained to the assessment year 2007-08 and challenged the order passed by the Commissioner of Income-tax(Appeals) regarding the disallowance of 10% of dividend income and long term capital gains under sec.14A. The Assessing Officer disallowed the amount as expenses related to earning exempted income. The assessee contended that no expenditure was incurred in earning these incomes. However, the Commissioner of Income-tax(Appeals) upheld the disallowance, stating it was for organizational expenses. The ITAT Chennai found the disallowance justified, emphasizing that even if Rule 8D was not applicable, the Assessing Officer had the authority to invoke sec.14A. Considering the composite nature of the assessee's activities as a share broker earning dividend and long term capital gains, the ITAT upheld the disallowance of 10%, deeming it reasonable and just.

Issue 2: Treatment of short term capital gains as business income:

The second issue revolved around the treatment of short term capital gains as business income by the Assessing Officer. The Commissioner of Income-tax(Appeals) supported this treatment based on judicial pronouncements and CBDT circulars. However, the ITAT Chennai disagreed, noting that the shares were sold as investments, supported by the earning of dividend income and long term capital gains. The assessee maintained separate portfolios for share investments and share broking activities, with clear details in their accounts. The ITAT emphasized that the intention of holding shares as investments was evident, and the Assessing Officer's decision seemed influenced by tax rate differences. Consequently, the ITAT directed the Assessing Officer to treat the short term capital gains as such and levy tax at the lower rate, ruling in favor of the assessee.

In conclusion, the ITAT Chennai partially allowed the appeal, rejecting the disallowance under sec.14A while deciding in favor of the assessee regarding the treatment of short term capital gains. The judgment provided detailed reasoning for each issue, emphasizing the factual and legal aspects to arrive at a fair decision.