2010 (11) TMI 441 - AT - Income Tax

Sale of shares - short term capital gains or business income - As per the view of ancillary object clause 3, assessee could make the investment in shares only in those companies which had their objects together or in part similar to those of assessee - company or carried on any business capable of being conducted so as directly or indirectly benefit the assessee - company - The assessee s alleged plea of investment does not meet this criteria - Frequency of transactions clearly demonstrates its intention to trade in shares and mutual funds and not to keep them as part of its investment portfolio - There was no intention to earn dividend because the shares were liquidated within three months - Therefore we can treat taht the sale of share is a business incime - Decided against of assessee. Apportionment of interest expenditure - Rule 8D(i)- find that the Hon ble Bombay High Court in Godrej Boyce Limited vs ACIT, vide judgment dated 12th August 2010, wherein, it has been held that applicability of Rule 8D is only prospective in operation, therefore, for assessment year 2005-06, it was not applicable - Again, the company is enjoying a short term loan of Rs. 95,000,000 borrowed at Indore Branch against the pledge of agricultural produce/commodities stored in approved warehouses as per sanction letter from the HDFC Bank dated 28th July 2004 - This short term loan can t be used for any other purpose. Hence, this loan is not utilised for investment in shares and mutual funds - Thus it can be seen that only company s funds are used for the purpose of investment - In case assessee had utilised its own funds, no disallowance was called for - Therefore, restore this issue to the file of Assessing Officer for examining this aspect afresh - Thus, appeal by the assessee is allowed for statistical purposes.

Issues Involved:
1. Classification of income from sale of shares as business income or short-term capital gains.
2. Disallowance under section 14A of the Income Tax Act related to expenditure incurred for earning exempt income.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:

The primary issue was whether the income from the sale of shares should be classified as business income or short-term capital gains. The assessee-company had declared short-term capital gains of Rs. 33,91,984 from the sale of shares and units, which the Assessing Officer (AO) reclassified as business income. The AO's decision was based on several observations:
- The frequency and volume of transactions (117 transactions with a total turnover of Rs. 1,36,28,674) indicated trading activity rather than investment.
- Some shares were sold within a few days of purchase, suggesting an intent to trade for profit rather than to invest for dividends.
- The board of directors' policy decisions did not influence the true nature of the income.
- The absence of borrowed funds for these transactions implied no pressing need to liquidate investments quickly, pointing to a profit motive.

The assessee argued that the shares were shown as investments in the balance sheet and that trading in shares was not part of its main business objectives. However, the Tribunal noted that the memorandum of association allowed the company to acquire shares, debentures, and securities in other companies. The Tribunal emphasized that the intention behind the transactions is crucial and must be inferred from the facts and circumstances of each case.

The Tribunal referred to various principles and precedents, including the CBDT Circular no.4 of 2007, which outlines criteria such as the magnitude of transactions, holding period, and motive. The Tribunal found that the frequency and pattern of transactions, along with the short holding periods (often within 50 days for shares and 100-150 days for mutual funds), indicated a trading intent rather than investment. Additionally, the Tribunal observed that the assessee liquidated shares even at a loss, which was inconsistent with an investment motive aimed at earning dividends.

Consequently, the Tribunal upheld the AO's classification of the income as business income, dismissing the assessee's appeal on this ground.

2. Disallowance under Section 14A:

The second issue concerned the disallowance of Rs. 1,93,479 under section 14A, which pertains to expenditure incurred in relation to earning exempt income. The AO had applied the principle of apportionment to allocate this amount from the total interest expenditure towards earning dividend income. The CIT(A) directed the AO to follow the methodology prescribed in Rule 8D(i).

The Tribunal referenced the Bombay High Court's decision in Godrej Boyce Limited vs ACIT, which held that Rule 8D is prospective and not applicable to the assessment year 2005-06. Therefore, the Tribunal vacated the CIT(A)'s directions to apply Rule 8D.

The assessee had contended that no borrowed funds were used for purchasing shares and mutual funds, and only the company's own funds were utilized. The Tribunal noted that this submission had not been examined by the lower authorities. Therefore, the Tribunal remanded the issue back to the AO for fresh examination of whether the assessee had indeed used its own funds. If the assessee's claim was verified, no disallowance under section 14A would be warranted.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes. The classification of income from the sale of shares as business income was upheld, while the issue of disallowance under section 14A was remanded to the AO for further examination. The order was pronounced in the open Court on 15.11.2010.

← Previous Next →