2013 (4) TMI 664 - AT - Income Tax

Sale of shares - Business income v/s Long Term Capital Gain - Held that - The valuation of the investment in shares is reflected in the balance sheet at cost and not as cost / market value whichever is lower. Furthermore, all the shares which have been sold were delivery based and the shares have been held for the period ranging between few months to more than 3 years by the assessee. Thus, the assessee has only made investment in equity shares and not in stock in trade, this is depicted and identifiable and the books of accounts in this regard. As the magnitude of the transactions in the investment account in comparison to the turnover disclosed trading account were negligible, LTCG has arisen on account of sale of 10000 shares in Ind Swift ltd. forming only 0.28% of the total holding and all these shares have been transferred only through one transaction and shares of Micro Tech. have been transferred through 3 transactions. In case of shares of paramount the shares have been sold through total 9 transactions between 3.4.06 to 28.4.06. Thus CIT(A) has rightly concluded that number of transactions are not large enough and neither they are frequent to hold that there has been any intention on part of the of the assessee to indulge into business of trading in shares & has earned substantial dividend income of Rs. 20,14,851/- during the year which is indication of the assessee s intention of investment in shares for earning dividend income. See C.I.T. vs. Rohit Anand (2010 (8) TMI 232 - Delhi High Court) wherein said that it is relevant to see the intention of the assessee at the time of making of investment so as to determine whether the transactions was for dealing in shares or making investment for earning dividend - No infirmity in the conclusion that profit arisen on sale of shares held as investment by the assessee deserves to be assessed as short term capital gain and long term capital gain as disclosed by the assessee. Against revenue. Addition u/s.14A by applying Rule 8D - CIT(A) deleted the addition - Held that - Addition made by the AO is not sustainable as Rule 8D is not applicable for asstt. year 2007-08. The interest related to loan of Rs. 2.5 crore taken by the assessee from M/s Cholamandalam Investment during the previous financial year 2005-06. The CIT(A) gave a finding that this has been used for the purpose of business and not for making any investment in shares. This was substantiated by the assessee through various details & opined that assessee had sufficient source of its own through which investment in shares have been made and these sources are interest free funds - No infirmity in the order of the CIT(A) - Against revenue.

Summary

Issues Involved:
1. Deletion of addition of Rs. 2,05,588/- on account of business income instead of Long Term Capital Gain under section 10(38) of the I.T. Act.
2. Deletion of addition of Rs. 25,81,645/- under section 14A by applying Rule 8D of I.T. Rules.

Issue 1: Deletion of addition of Rs. 2,05,588/- on account of business income instead of Long Term Capital Gain under section 10(38) of the I.T. Act

*Analysis:*
The assessee, primarily engaged in research and experimental development, disclosed income from long-term gain on the sale of shares amounting to Rs. 2,05,588/- and short-term capital gain of Rs. 9,56,491/-. The Assessing Officer (AO) issued a show cause notice questioning why these gains should not be assessed as business income. The AO concluded that the frequent transactions in shares indicated a motive to earn profits rather than dividends, referencing CBDT Circular No. 4/2007 and several case laws.

The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] observed that the assessee maintained books of accounts showing shares as investments, valued at cost in the balance sheet. The shares were held for periods ranging from a few months to over three years. The CIT(A) referenced Board Circular No. 7 dated 15.6.2007 and decisions from the Hon'ble Delhi High Court and Mumbai High Court, concluding that the gains should be assessed under capital gains, not business income.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee maintained clear records of investments and the transactions were not frequent enough to indicate trading activity. The substantial dividend income earned further supported the intention of investment for dividends. The Tribunal found no infirmity in the CIT(A)'s conclusion that the gains should be assessed as capital gains.

Issue 2: Deletion of addition of Rs. 25,81,645/- under section 14A by applying Rule 8D of I.T. Rules

*Analysis:*
The AO applied Rule 8D to disallow Rs. 25,81,645/- as expenses related to earning tax-free dividend income of Rs. 20,14,851/-. The CIT(A) held that Rule 8D was not applicable for the assessment year 2007-08, referencing the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The CIT(A) found that the interest expenses were related to business activities and not for earning exempt income, as the loan from M/s Cholamandalam Investment was used for business purposes.

The CIT(A) also analyzed administrative expenses, attributing a reasonable portion to the earning of exempt income. The CIT(A) concluded that only Rs. 1,17,132/- should be disallowed, based on a detailed analysis of the expenses and their relation to earning dividend income.

The Tribunal referenced the Hon'ble Jurisdictional High Court decision in Maxopp Investment Ltd. vs. C.I.T., emphasizing that Rule 8D is prospective and not applicable for the assessment year 2007-08. The Tribunal upheld the CIT(A)'s findings that the interest expenses were not related to investments in shares and that the disallowance of administrative expenses was reasonable and cogent.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both issues. The gains from the sale of shares were rightly assessed as capital gains, and the disallowance under section 14A was appropriately limited to Rs. 1,17,132/-.