2016 (11) TMI 1388 - AT - Income Tax

Income from share transactions - Short Term Capital Gains OR Business Income - Held that - A perusal of details of transactions entered by assessee in Scrip Jain Irrigation shows that the assessee earned income of 14.75 Lacs on turnover of 195.86 Lacs with high frequency of transactions in this particular scrip. The holding period ranges from 0 days to 30 days. The assessee has purchased the scrip in 37 days and sold the scrip in 27 days. The frequency and repetitive nature of transaction in one single scrip shows a clear profit motive on the part of the assessee and negates its contention that the assessee has indulged in investment activity. A substantial relief has already been provided by CIT(A) with respect to balance amount. Therefore we find no infirmity in the order of CIT(A) and dismiss this ground of appeal of the assessee. Section 14A disallowance - Held that - No calculations have been provided by AO so as to arrive at the figures of 1, 65, 595/- in the assessment order. As per Ld. AR the assessee agitated the matter before CIT(A) but the same was not considered. Further the Ld. AR has contended that this disallowance if any has to be made then it should be restricted to amount of dividend earned by the assessee. Therefore we deem it fit to restore the matter back to the file of AO for limited purpose to recompute 14A disallowance and restrict the same to the extent of tax free income earned by the assessee. The assessee is directed to cooperate with the AO to supply necessary information / documents forthwith to substantiate his claim in this regard failing which AO shall be at liberty to compute the same on the basis of material available on record. This ground of assessee is partly allowed.

Summary

Issues:
Assessment of 'Short Term Capital Gains' as 'Business Income' and 14A disallowance.

Analysis:
1. The appeal was against the assessment of Short Term Capital Gains (STCG) as Business Income and a 14A disallowance of ?1,65,595. The assessee, a Resident HUF engaged in shares/securities transactions, declared total income of ?43,22,899 for AY 2010-11. The AO determined the total income at ?42,70,920, considering STCG on securities transactions, speculation loss, and other income. The AO concluded that the transactions constituted Business Income due to regularity, systematic manner, profit motive, low holding period, and repetitive sale & purchase transactions. Additionally, a 14A disallowance was made under Rule 8D. The CIT(A) partially allowed the appeal, treating transactions related to a specific scrip as Business Income and the rest as STCG, while upholding the 14A disallowance.

2. The assessee argued that the income should be under Capital Gains as it maintained separate trading and investment portfolios with an investment motive. The AR cited precedents and the balance sheet to support the claim. The AR contended that no 14A disallowance was warranted as the dividend was from the trading portfolio. The AR suggested restricting any 14A addition to the tax-exempt income. The Revenue argued that the repetitive transactions with a profit motive indicated Business Income, and the res judicata principle did not apply. The Tax-Free income justified the 14A disallowance.

3. The ITAT found that transactions in the specific scrip showed a profit motive, with high turnover and short holding periods, indicating Business Income. The CIT(A)'s decision was upheld, dismissing the appeal on this ground. The case laws cited were deemed irrelevant to the current case. Regarding the 14A disallowance, no calculations were provided by the AO, and the CIT(A) did not address the issue. The ITAT directed the AO to recompute the disallowance, restricting it to the tax-free income earned by the assessee, emphasizing cooperation from the assessee.

4. In conclusion, the ITAT partly allowed the appeal, dismissing the grounds related to STCG assessment as Business Income but directing a reassessment of the 14A disallowance. The decision was pronounced on 11th November 2016.