2011 (7) TMI 535 - AT - Income Tax

Profit on sale of investment - Long Term Capital Gain and Short Term Capital Gain or Business income - the assessee has contended that all the share transactions are under the head investment and not for trading purposes - Held that - Considering the totality of the facts and circumstances of the case and respectfully following the orders of the Tribunal in the case of the assessee itself for earlier years and the decision of CIT Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT wherein held that delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding C.I.T.(A) was justified in directing the A.O. to accept the LTCG of Rs.2,50,40,713.45 and LTCG (with indexation) of Rs.92,393.20. Considering the period involved in purchase and sale of the shares relating to some of the share transactions within short span of days, that is to say within a period of one month or so, considered view that those transactions be re-examined by the A.O. to see as to whether the purchases and sales of those shares were carried out by the assessee with an intention for investment purposes or for share trading purposes after giving due opportunity of hearing and considering such evidences as may be produced by the assessee - Thus STCG in respect of shares, which were held by assessee for a period of 30 days or more be accepted. However, in respect of shares which were held by the assessee for a period of less than 30 days, the A.O. will examine the same as to whether those shares were transacted for investment purposes or trading purposes after giving opportunity of hearing to the assessee. Disallowance u/s. 14A r.w.r.8D of I.T. Rule - Held that - The authorities below were not justified to apply Rule 8D of the Rules for the purpose of making disallowance u/s. 14A as the dividend income shown by the assessee of Rs.9,85,958/- is exempted from tax u/s. 10(34). Be that as it may, it will be reasonable to make disallowance of Rs.12,000/- as per Sec. 14A as the dividend income of Rs.9,85,958/- is exempt from tax u/s. 10(34). Hence the cross-objection of the assessee is allowed in part by restricting the disallowance to Rs.12,000/- - Hence, the cross-objection of the assessee is allowed in part.

Summary

Issues Involved:
1. Classification of income from the sale of shares and mutual funds as either capital gains or business income.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Classification of Income from Sale of Shares and Mutual Funds:

Facts and Background:
The assessee-company, engaged in trading and investing in shares, securities, and mutual funds, declared its income, including long-term capital gains (LTCG) and short-term capital gains (STCG), in its return. The Assessing Officer (A.O.) treated these gains as business income rather than capital gains, arguing that the initial purchase of shares was for resale profit.

Tribunal's Findings:
The Tribunal considered the assessee's consistent treatment of shares as investments in previous years, supported by entries in the books of account. It noted that the assessee had maintained separate portfolios for trading and investment purposes. The Tribunal upheld the assessee's claim of LTCG and STCG, citing earlier Tribunal decisions for the assessment years 2004-05 and 2005-06, where similar transactions were treated as capital gains.

Legal Precedents:
The Tribunal referred to the principle laid down by the Hon'ble Bombay High Court in Gopal Purohit vs. JCIT, which supported maintaining separate portfolios for investment and trading. It emphasized that consistent treatment and the intention at the time of purchase are crucial in determining the nature of transactions.

Conclusion:
The Tribunal upheld the CIT(A)'s direction to treat the gains as capital gains, dismissing the Revenue's appeal. However, it remanded the matter to the A.O. for re-examination of transactions involving shares held for less than 30 days to determine if they were for investment or trading purposes.

2. Disallowance Under Section 14A Read with Rule 8D:

Facts and Background:
The A.O. disallowed Rs. 8,48,305 under Section 14A read with Rule 8D, related to exempt dividend income of Rs. 9,85,958. The CIT(A) upheld this disallowance.

Tribunal's Findings:
The Tribunal referred to the Hon'ble Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd. vs. DCIT, which held that Rule 8D is prospective and applicable from the assessment year 2008-09 onwards. The Tribunal agreed that a reasonable disallowance should be made instead of applying Rule 8D.

Conclusion:
The Tribunal restricted the disallowance to Rs. 12,000, considering it reasonable under Section 14A, and allowed the cross-objection of the assessee in part.

Final Order:
The Tribunal allowed the department's appeal in part for statistical purposes and the assessee's cross-objection in part, pronouncing the order in open Court on 28.7.2011.