2014 (9) TMI 1047 - AT - Income Tax

Disallowance made u/s 14A - Held that - In the instant case, the AO did not make any reference to the accounts in order to examine the correctness of the claim made by the assessee. The dividend income earned by the assessee is also ₹ 62,134/- only. The disallowance computed by the AO show that he has proposed to disallow only general expenses only. Hence, under these circumstances, in order to put this issue at rest, we estimate the disallowance to be made u/s 14A of the Act at ₹ 1,000/- by considering the Profit and loss account placed at page 7 of the paper book. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s 14A at ₹ 1,000/-. Assessment of Short Term Capital Gains as business income of the assessee - Held that - There is no reason to suspect the nature of activity carried on by the assessee during the year under consideration. Accordingly, we are unable to agree with the view taken by the tax authorities. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the assessing officer to assess the impugned gain as Short term Capital gain only.

Summary

Issues:
1. Disallowance made u/s 14A of the Act
2. Assessment of Short term capital gain as Business Income
3. Charging of interest u/s 234A, 234B and 234C

Issue 1: Disallowance made u/s 14A of the Act
The appeal concerns disallowance u/s 14A of the Act. The AO disallowed &8377; 71,642, applying Rule 8D(2)(iii) of the Income Tax Rules, 1962, restricted to the amount of dividend income. The CIT(A) upheld this decision citing a special bench decision. However, the ITAT found Rule 8D not applicable for AY 2006-07 per a High Court ruling. The AO didn't consider the accounts to verify the claim. The ITAT estimated disallowance at &8377; 1,000 based on the Profit and Loss account, directing the AO to restrict the disallowance accordingly.

Issue 2: Assessment of Short term capital gain as Business Income
The second issue involves assessing Short Term Capital Gains as business income. The AO and CIT(A) deemed the gains as business income based on repetitive transactions. However, the ITAT noted the lack of independent judgment and reliance on CBDT guidelines. The ITAT analyzed the gains and transaction details, concluding that the gains should be treated as Short Term Capital Gains, not business income, due to the investor's intention and source of funds.

Issue 3: Charging of interest u/s 234A, 234B and 234C
Regarding interest under sections 234A, 234B, and 234C, the ITAT clarified that interest under sec. 234C is chargeable on returned income, not assessed income. The AO was directed to compute interest under these sections correctly. Ultimately, the ITAT partly allowed the appeal, setting aside the CIT(A)'s order on the second issue and directing the AO to assess the gains as Short Term Capital Gains.

In conclusion, the ITAT's judgment addressed the disallowance u/s 14A, assessment of gains as business income, and charging of interest under specific sections. The decision provided detailed reasoning for each issue, emphasizing the importance of independent judgment, proper application of rules, and accurate computation of interest.