2014 (12) TMI 1196 - AT - Income Tax

Profits and gains on purchase and sale of shares - assessed under the head capital gains or profits and gains of business - Held that - we have to necessarily hold that the gains derived from the purchase and sale of shares by the assessee is rightly offered to tax under the head capital gains and not business income. The facts show that out of the total short term capital gain of ₹ 1,75,51,496/- the undisputed fact is that an amount of ₹ 1,39,41,555/- was earned on shares which were held by the assessee for more than 30 days. In fact short term capital gain of ₹ 83,56,196/- was earned on shares which were held for more than 4 months. Similarly the assessee earned capital gains of more than ₹ 40 lakhs for shares which were held for more than 5 months. This is not a characteristic of a trader. There are no borrowed funds. The assessee has always classified the purchases as investments in its books of accounts. In the earlier year the assessee has disclosed capital gains and the AO in the order passed u/s 143(3) accepted the same. On this factual matrix we agree with the contentions of the Ld.Counsel for the assessee that the gains in question cannot be assessed under the head income from business. We hold that the entire profits from the purchase and sale of shares have to be assessed under the head capital gains . - Decided in favour of assessee Disallowance u/s 14A - Held that - t the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the AO and has also not been doubted by the CIT(A). Thus we set aside this issue to the file of AO for fresh adjudication in accordance with law as the facts are not clearly coming out in the assessment order as to whether the assessee has earned tax free income during the year - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Classification of gains from the sale of shares as business income or short-term capital gain.
2. Allowance of proportionate expenses of securities transactions tax as a deduction from business income.
3. Double addition of fees paid to the Registrar of Companies.
4. Disallowance of expenditure under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Gains from Sale of Shares:
The primary issue in this case was whether the gains from the sale of shares should be treated as business income or short-term capital gains. The Assessing Officer (AO) treated the gains as business income, citing reasons such as regular and continuous transactions, lack of separate books for investments and business, and short holding periods of shares. The First Appellate Authority partly agreed with the assessee, treating gains from shares held for more than 30 days as short-term capital gains and those held for less than 30 days as business income.

The Tribunal, however, disagreed with the First Appellate Authority's segregation based on the holding period. It emphasized that the intention behind the transactions and other factors, such as the classification of shares as investments in the balance sheet, the absence of borrowed funds, and the acceptance of similar gains as capital gains in previous years, were crucial. The Tribunal concluded that the gains should be treated as capital gains, not business income, and rejected the artificial segregation based on the holding period.

2. Allowance of Proportionate Expenses of Securities Transactions Tax:
The Revenue's appeal included a ground challenging the direction to allow proportionate expenses of securities transactions tax as a deduction from business income. However, since the Tribunal concluded that the gains should be treated as capital gains, this issue became moot, and the Revenue's appeal on this ground was dismissed.

3. Double Addition of Fees Paid to Registrar of Companies:
The assessee claimed that the fees paid to the Registrar of Companies had been disallowed twice. The Tribunal set aside this matter to the AO for verification and necessary orders, ensuring that any double addition would be corrected.

4. Disallowance of Expenditure under Section 14A:
For the AY 2007-08, the AO disallowed expenditure under Section 14A, which pertains to expenses incurred in relation to income not forming part of total income. The Tribunal referred to the jurisdictional High Court's decision, which held that Section 14A cannot be invoked when no exempt income is earned. Consequently, the Tribunal set aside this issue to the AO for fresh adjudication, instructing the AO to verify whether the assessee earned tax-free income during the year and to apply the law accordingly.

Conclusion:
The Tribunal allowed the assessee's appeals in part, treating the gains from the sale of shares as capital gains and not business income. It also addressed the issue of double addition of fees and disallowance under Section 14A, setting aside these matters for further verification and proper adjudication. The Revenue's appeals were dismissed.

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