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2012 (2) TMI 169 - AT - Income TaxSale/Purchase of Shares - Capital Gain OR Business Income - One share of Jubilant Organosys Limited held as long Term - Investment in (JOL) under Special resolution - Motive to earn dividend - Shown as Investment In B/ST - Held That - Taxable under head Capital Gains. Shares held for small period of time - motive to earn profit - Held That - Short term capital gain assessable under Business Income. Expennditure in relation to exempt Income - Held That - In view of Godrej Boyce Mfg. Co.(Mumbai High Court). Appeal allowed for statistical purposes.
Issues Involved:
1. Classification of gains from sale of short-term and long-term capital assets. 2. Applicability of Section 14A of the Income Tax Act and Rule 8D for disallowance of expenditure related to exempt income. Detailed Analysis: 1. Classification of Gains: Assessee's Appeal: The assessee contested the classification of gains from the sale of short-term capital assets as "Profits and Gains of Business and Profession" instead of Short-Term Capital Gains. The grounds included: - The Ld. Commissioner of Income Tax (Appeals) erred in confirming the Assessing Officer's (AO) decision to treat the gains of Rs. 1,10,25,787/- from short-term capital assets as business income. - The shares held and disclosed as investments were incorrectly treated as trading assets. - The direction to apply Rule 8D for disallowance under Section 14A was inappropriate. Revenue's Appeal: The revenue challenged the Ld. Commissioner of Income Tax (Appeals)'s direction to treat income of Rs. 53,61,68,729/- from trading of long-term shareholding as capital gain instead of business income. Findings: - The assessee, a private limited company, engaged in the sale and purchase of shares and mutual funds, reported a business loss, Short-Term Capital Gains (STCG), and Long-Term Capital Gains (LTCG). - The AO observed that despite holding shares for a long period, the activity of selling and purchasing shares was a trading activity, not an investment. - The AO noted several factors indicating that share transactions were business income, including regular transactions, continuous purchase and sale, lack of separate books for investments, and short holding periods. Ld. Commissioner of Income Tax (Appeals) Observations: - The Ld. Commissioner of Income Tax (Appeals) noted that the legal provisions and CBDT Circular No. 4/2007 permit holding shares for both investment and trading. - For LTCG, it was observed that the sale related to Jubilant Organosys Limited (JOL) shares, held in a separate DMAT account, purchased with the intent of long-term investment and earning dividends. - The shares of JOL were consistently shown as investments since A.Y. 2001-02, and the claim for LTCG was accepted by the department in the previous years. Short-Term Capital Gains: - The Ld. Commissioner of Income Tax (Appeals) observed frequent transactions and short holding periods for various shares, indicating an intention to earn short-term profits rather than dividends. - The transactions were treated as business income due to the frequency of transactions, short holding periods, and the intent to earn profits. Tribunal's Decision: - The tribunal upheld the Ld. Commissioner of Income Tax (Appeals)'s decision to treat the gains from JOL shares as LTCG, given the substantial holding period and consistent treatment as investments. - For STCG, the tribunal agreed with the Ld. Commissioner of Income Tax (Appeals) that frequent transactions and short holding periods indicated business income. 2. Applicability of Section 14A and Rule 8D: Assessing Officer's Decision: - The AO disallowed Rs. 10,00,000/- under Section 14A, attributing it to administrative expenses related to earning exempt dividend income. Ld. Commissioner of Income Tax (Appeals) Decision: - Directed the AO to make the disallowance as per Rule 8D. Tribunal's Decision: - The tribunal noted that Rule 8D, notified on 24.3.2008, is applicable from A.Y. 2008-09 and not for A.Y. 2006-07. - The issue was remitted to the AO for reconsideration in light of the Hon'ble Mumbai High Court decision in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT. Conclusion: - The appeal filed by the assessee was partly allowed for statistical purposes. - The appeal filed by the revenue was dismissed. - The order was pronounced in the Open Court on 06/1/2012.
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