2014 (9) TMI 1045 - AT - Income Tax

Share transaction - Capital gain OR business income - Held that - No infirmity in the order of the CIT(A) holding that the activity of transactions in shares/mutual funds by engaged the PMS was an investment activity and therefore the resultant gain was assessable under the head capital gains . Disallowance u/s.14A - Held that - CIT(A) has given a categorical finding that expenditure on PMS has not been claimed by the assessee and there does not remain any other expenditure other than this expenditure. Therefore, no disallowance u/s.14A r.w. Rule 8D can be made. The above factual finding given by the Ld.CIT(A) could not be controverted by the Ld. Departmental Representative. Under these circumstances, we hold that the CIT(A) was justified in deleting the disallowance made by the AO.

Summary

Issues Involved:
1. Classification of gains from transactions in shares/mutual funds through Portfolio Management Services (PMS) as either "Capital Gains" or "Income from Business & Profession".
2. Applicability of disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Gains from Transactions in Shares/Mutual Funds through PMS:

The primary issue revolves around whether the gains from transactions in shares/mutual funds through PMS should be classified as "Capital Gains" or "Income from Business & Profession". The assessee had declared the gains as "Capital Gains", but the Assessing Officer (AO) reclassified them as "Income from Business & Profession", arguing that the transactions were systematic, organized, and frequent, indicative of trading rather than investment.

The CIT(A) disagreed with the AO, holding that the activity was an investment activity, and the resultant gains should be assessed under "Capital Gains". This decision was based on the Tribunal's earlier rulings in similar cases, including the assessee's own case for previous years. The Tribunal had previously concluded that the volume and frequency of transactions did not necessarily indicate a business activity, especially since PMS providers are legally prohibited from speculative trading.

The Tribunal upheld the CIT(A)'s decision, noting that the AO's arguments about the nature of transactions and the motive of earning dividends were not supported by the facts. The Tribunal found no reason to deviate from its earlier rulings, affirming that the investments through PMS were indeed investment activities, and the gains should be classified under "Capital Gains".

2. Applicability of Disallowance under Section 14A:

The second issue concerns the disallowance under section 14A of the Income Tax Act, which pertains to the expenditure incurred in relation to income not includible in total income. The AO had disallowed an amount under section 14A, calculated as 0.5% of the average investment, arguing that the assessee had earned tax-free dividends from share trading through PMS.

The CIT(A) deleted this disallowance, referencing the Tribunal's earlier decision in the assessee's own case. The Tribunal had previously held that since the expenditure on PMS was not claimed by the assessee, no other expenditure remained to be disallowed under section 14A read with Rule 8D. The Tribunal reiterated this position, noting that the factual finding by the CIT(A) was uncontroverted by the Revenue. Consequently, the disallowance made by the AO was deleted, and the ground raised by the Revenue was dismissed.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decisions in all the cases. The gains from transactions in shares/mutual funds through PMS were to be assessed under "Capital Gains", and no disallowance under section 14A was warranted since the expenditure on PMS was not claimed by the assessees. The Tribunal's consistent application of its earlier rulings played a crucial role in these decisions.

Pronouncement:

The judgment was pronounced in the open court on 24-09-2014, dismissing all four appeals filed by the Revenue.