2016 (6) TMI 1270 - AT - Income Tax

Sale of shares and redemption of units of Mutual Fund - capital gains (long term and short term) or business income - Held that - As noticed from assessee s investment chart regarding long and short term capital gains that most of the investments have seen holding period for quite a longer duration. There is a very miniscule percentage of share investments being made and sold in a very short span of time less than a week. The assessee s long term capital gains arise from investment held for much longer duration of more than a year. It has come on record that his balance sheet shows two different patterns of trading and investment portfolio. We come to his City Bank borrowings of ₹ 20 crores. It emanates that the assessee had indeed availed this loan. But the same was for a period of less than one month whereas his investments are seen to have carried forward since long. The Revenue fails to rebut all these crucial findings recorded by the lower authorities. We adopt judicial consistency in these facts and circumstances to hold that the CIT(A) has rightly treated assessee s profits/losses arising from shares investments as in the nature of capital gains than business income. Section 14A disallowance relating to exempt income from dividends - Held that - A perusal of section 14A(2) reveals that the Assessing Officer has to record a non satisfaction having regard to an assessee s account that the same are not correct in respect to expenditure in relation to exempt income not forming part of the total income under the act. There is no dispute that Rule 8D is applicable w.e.f. assessment year. 2008-09. However, we notice from the assessment order that there is no such satisfaction or non satisfaction being recorded before invoking Rule 8D resulting in the impugned disallowance. The Revenue further fails to rebut the lower appellate finding that the assessee has not incurred any expenditure as held in Commissioner of Income Tax-II Versus M/s Hero Cycles Ltd. (2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT ). Its arguments seeking to revive the impugned disallowance accordingly fail.

Summary

Issues Involved:
1. Classification of income from sale of shares and redemption of mutual funds as capital gains or business income.
2. Treatment of loss in Portfolio Management Services (PMS) as short term capital loss.
3. Treatment of gains from sale of shares and redemption of mutual funds as short term capital gain.
4. Treatment of gains from redemption of mutual funds as long term capital gain.
5. Treatment of gains from redemption of mutual funds as long term capital gain.
6. Treatment of loss as long term capital loss and its carry forward.
7. Disallowance under section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue was whether the assessee's profits/losses from the sale of shares and redemption of mutual funds should be treated as capital gains (long term and short term) or business income. The assessee was engaged in the business of shares trading and mutual funds and had filed returns showing capital gains and losses. The Assessing Officer (AO) considered these transactions as business income, citing reasons such as the systematic approach, short holding periods, and loans availed by the assessee. The CIT(A) disagreed, noting that the assessee consistently declared mutual fund units, shares, and equity funds as investments in the balance sheet, indicating an investor's intention. The CIT(A) also observed that the assessee had a history of treating such gains as capital gains in previous years, and the number of transactions was relatively small, further supporting the investor classification.

2. Treatment of Loss in PMS:
The CIT(A) held that the loss of ?51,24,792 in PMS should be treated as short term capital loss. The CIT(A) referred to various judicial precedents, including decisions from the Mumbai and Pune ITAT, which supported the view that income from PMS should be taxed as short term capital gain.

3. Treatment of Gains from Sale of Shares and Redemption of Mutual Funds:
The CIT(A) directed the AO to treat the gains of ?82,98,814 from the sale of shares and redemption of mutual funds as short term capital gain. The CIT(A) emphasized that the assessee had consistently declared such gains as capital gains in previous years, and the transactions were not frequent enough to classify them as business income.

4. Treatment of Gains from Redemption of Mutual Funds as LTCG:
The CIT(A) directed the AO to tax the gains of ?6,68,91,385 from the redemption of mutual funds as long term capital gain. The CIT(A) noted that mutual fund units are not traded on stock exchanges and are purchased directly from mutual fund companies, indicating that the gains should be treated as capital gains.

5. Treatment of Gains from Redemption of Mutual Funds as LTCG:
Similarly, the CIT(A) directed the AO to tax the gain of ?76,657 from the redemption of mutual funds as long term capital gain, following the same reasoning as in the previous issue.

6. Treatment of Loss as Long Term Capital Loss:
The CIT(A) directed the AO to treat the loss of ?21,45,045 as long term capital loss and allow it to be carried forward. The CIT(A) found that the assessee had consistently declared such losses as capital losses, supporting the investor classification.

7. Disallowance under Section 14A:
The AO had disallowed ?57,72,237 under section 14A, which relates to expenses incurred in earning exempt income. The CIT(A) deleted this disallowance, noting that the assessee had not claimed the expenses in the profit and loss account. The CIT(A) referred to the Punjab and Haryana High Court's decision in CIT v/s. Hero Cycles Ltd., which held that if no expenditure is incurred for earning exempt income, disallowance under section 14A cannot be made. The Tribunal upheld this view, noting that the AO had not recorded any dissatisfaction with the assessee's accounts before invoking Rule 8D.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to treat the assessee's profits/losses from shares and mutual funds as capital gains rather than business income, and deleting the disallowance under section 14A. The Tribunal emphasized the importance of consistency in classification and the need for the AO to record dissatisfaction before making disallowances under section 14A.