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2012 (5) TMI 335 - AT - Income TaxBusiness income vs. capital gain - sale and purchase of shares - Held that - net surplus shown by the assessee is the capital gain on account of the sale/redemption of the assessee s investment and the same is taxable under the head capital gains and not as business income. Regarding disallowance u/s. 14A - Rule 8D of the Income Tax Rules, 1962 - Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) has already held that applicability of Rule 8D of the Rules as prospective and not retrospective w.e.f. assessment year 2007-08, wherein Hon ble High Court has also directed to recompute disallowance in case there is a nexus for expenses with exempt income by laying down the principle - Appeal is allowed by way of direction to AO to restrict the disallowance at 1% of exempted income as expenses related to this income
Issues:
1. Treatment of business income as capital gains without evidence. 2. Application of Rule 8D for disallowance u/s. 14A. Issue 1: Treatment of business income as capital gains without evidence: The appeal by revenue and cross objection by the assessee arose from the order of CIT(A)-XII, Kolkata, regarding the assessment framed by DCIT, Circle-12, Kolkata for Assessment Year 2007-08. The first issue was the revenue's challenge against CIT(A)'s decision to treat business income as capital gains without proving the business was capital in nature. The CIT(A) directed the Assessing Officer to treat the net surplus from sale/redemption of shares/units as capital gains based on the appellant's intention to treat shares as investments, not stock-in-trade, supported by entries in the books of account. The Tribunal upheld CIT(A)'s decision, citing previous judgments and the appellant's intention to hold shares as investments. The Tribunal dismissed the revenue's appeal, finding no error in CIT(A)'s order. Issue 2: Application of Rule 8D for disallowance u/s. 14A: The second issue involved the application of Rule 8D of the Income Tax Rules for disallowance u/s. 14A. The Assessing Officer added back Rs.6,69,062/- for not attributing expenses to exempted income, applying Rule 8D. The CIT(A) upheld the adoption of Rule 8D but directed the AO to recalculate the average value of total assets without reducing current liabilities and provisions. The Tribunal referred to the Bombay High Court's decision on the prospective application of Rule 8D and directed the AO to restrict the disallowance to 1% of exempted income, following previous decisions. Consequently, the appeal of the revenue was dismissed, and the cross objection of the assessee was partly allowed. In conclusion, the Tribunal upheld the CIT(A)'s decision on both issues, affirming the treatment of business income as capital gains and providing guidelines for the application of Rule 8D for disallowance u/s. 14A. The judgment highlighted the importance of the appellant's intention in determining the nature of income and the need for a reasonable basis for expense attribution in relation to exempt income.
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