2012 (6) TMI 473 - AT - Income Tax

Treatment on purchase and sale of shares as Business Income as against Capital Gain Held that - assessee s transaction of shares is in the nature of investment in shares and accordingly delivery based transaction in the present case is treated as those in the nature of investment and profit received is to be treated either as short-term capital gain or long-term capital gain depending upon the period of holding. CIT(A) has rightly held the transactions of the assessee as investment in shares chargeable to capital gain by taking uniformity in treatment and observing the principle of consistency, when the facts and circumstances are identical in assessee s own case in earlier years. appeals of revenue is dismissed Whether CIT(A) was wholly wrong and unjustified in confirming the arbitrary, ad hoc and estimated disallowance of expense of Rs. 2,80,686/- u/s 14A of the I.T Act @ 5% of the exempt dividend income made in the assessment merely on presumption without considering the fact that no expenditure was incurred for earning the said income and without bringing on record any material or evidence to establish the nexus between such alleged expenditure and the earning of said income Held that - in the case of Godrej Boyce Mfg. Co. Ltd. (2010 - TMI - 78448 - BOMBAY HIGH COURT - Income Tax), that Rule 8D is applicable for and from assessment year 2008-09 and prior to that the Assessing Officer can make estimate in the given facts and circumstances. disallowance restricted to 1% in relation to earning of exempted dividend income and direct the Assessing Officer to calculate the expenditure on that basis. This ground of assessee s cross objections is partly allowed. appeals of the revenue are dismissed and the Cross Objections of the assessee are partly allowed

Issues Involved:
1. Classification of income from the sale of shares and securities as 'Capital Gains' versus 'Business Income'.
2. Disallowance of expenses under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Classification of Income from Sale of Shares and Securities:
The primary issue in both appeals by the revenue was whether the profit from the sale of shares and securities should be assessed under 'Capital Gains' or 'Business Income'. The Assessing Officer (AO) had classified the income as 'Business Income' based on the company's systematic and organized transactions of buying and selling shares, which he considered as business activities. The AO also noted the company's main objectives as per its Memorandum of Association, which included dealing in shares and securities.

The CIT(A) reversed the AO's decision, holding that the company was an investment company, and the income from the sale of shares should be classified as 'Capital Gains'. The CIT(A) cited several judicial precedents, including the Supreme Court's decision in CIT v. Associated Industrial Development Co. Ltd. and the Mumbai Tribunal's decision in Janak S. Rangwaila v. ACIT, which emphasized the intention behind holding shares and the treatment of such shares in the company's books.

The CIT(A) noted that:
- The shares/units were classified as 'Investment' in the company's books.
- Profits from the sale of shares were declared as 'Capital Gains' in previous years and assessed as such.
- Investments were made from the company's own funds, not borrowed funds.
- Shares were carried at 'cost price' in the books, not at 'cost or market price', which is typical for stock-in-trade.

The revenue's arguments, presented by the CIT-DR, included the magnitude and frequency of transactions, the company's objective to deal in shares, and the systematic manner of transactions. However, the Tribunal found that the shares were held for considerable periods, and the investments were made from the company's own funds. The Tribunal emphasized the principle of consistency, noting that the revenue had accepted the classification of income as 'Capital Gains' in previous years.

The Tribunal concluded that the transactions were in the nature of investment, and profits should be treated as 'Capital Gains'. This decision was based on uniformity in treatment and the principle of consistency, given identical facts and circumstances in earlier years.

2. Disallowance of Expenses under Section 14A:
The assessee's cross-objections involved the disallowance of expenses under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to earning exempt income. The AO had made an ad hoc disallowance of expenses, which the CIT(A) enhanced by applying Rule 8D of the Income Tax Rules.

The Tribunal noted that Rule 8D, which provides a method for determining the amount of expenditure in relation to exempt income, is applicable prospectively from the assessment year 2008-09, as held by the Bombay High Court in Godrej Boyce Mfg. Co. Ltd. v. Dy.CIT. For years prior to 2008-09, the AO must adopt a reasonable basis for determining such expenditure.

The Tribunal decided to restrict the disallowance to 1% of the exempt dividend income, consistent with the view taken by other coordinate benches of the Tribunal. The AO was directed to calculate the disallowance on this basis.

Conclusion:
The Tribunal dismissed the revenue's appeals, upholding the CIT(A)'s decision to classify the income from the sale of shares and securities as 'Capital Gains'. The Tribunal partly allowed the assessee's cross-objections, restricting the disallowance of expenses under Section 14A to 1% of the exempt dividend income.

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