2011 (3) TMI 1663 - AT - Income Tax

Summary

Issues Involved:
1. Classification of net surplus on sale of shares as capital gain or business income.
2. Set off of short-term capital loss against business income.
3. Disallowance of expenditure u/s 14A.

Summary:

1. Classification of Net Surplus on Sale of Shares:
The primary issue was whether the net surplus from the sale of shares should be treated as capital gain or business income. The CIT(A) directed the AO to treat the net surplus on account of the sale of shares as capital gain instead of business income. The CIT(A) observed that the intention of the appellant was to treat shares as investments, as evident from the entries in the books of account and balance sheet. The Tribunal upheld the CIT(A)'s decision, noting that the shares were acquired from an amalgamating company where they were held as investments. The Tribunal emphasized that the initial intention at the time of purchase is crucial in determining whether the transaction is an investment or trading. The Tribunal also referenced the decision in the case of Reliance Trading Enterprises Ltd., which supported the view that shares held as investments should be treated as capital assets. Consequently, the Tribunal rejected the Revenue's appeal on this ground.

2. Set Off of Short-Term Capital Loss:
The CIT(A) allowed the set off of the short-term capital loss against the current year's short-term capital gain, following the decision to treat the net surplus on the sale of shares as capital gain. The Tribunal upheld this decision, noting that it was a consequential relief following the classification of the net surplus as capital gain.

3. Disallowance of Expenditure u/s 14A:
The assessee contested the disallowance of expenditure u/s 14A, which was made by applying Rule 8D. The CIT(A) had directed the AO to apply Rule 8D following the decision of the ITAT Special Bench in the case of Daga Capital Management. However, the Tribunal noted that the decision in Daga Capital Management was overruled by the Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd., which held that Rule 8D is prospective and applicable from AY 2008-09. The Tribunal set aside the orders of the authorities on this issue and restored the matter to the CIT(A) for re-adjudication in light of the Bombay High Court's decision.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection for statistical purposes. The net surplus on the sale of shares was to be treated as capital gain, the short-term capital loss was allowed to be set off against the capital gain, and the disallowance u/s 14A was to be re-adjudicated by the CIT(A).