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2014 (1) TMI 1302 - AT - Income TaxShort term capital gain treated as business income Authenticity of valuation of stock - Held that - The main object of the company clearly show that it want to carry on financing business other than banking business within the meaning of Banking Regulation Act, 1949 - In the light of the Memorandum of Association, in the immediate preceding assessment year and also in the subsequent assessment year, there is not even a single item of income which could be said to be in pursuance of the main object of the company - the assessee has shown income only from share transactions. The capital gains has been shown under the head business income - the assessee has never filed any revised return claiming the income under the head capital gains - The contention that the assessee has been showing the investment under the head investment in the balance sheet do not hold any water because book entries cannot justify the nature of transaction Relying upon Kedarnath Jute Manufacturing Co. Ltd. Vs CIT 1971 (8) TMI 10 - SUPREME Court - the assessee clearly show that the assessee has not done any business in pursuant to its main object - Then how the auditors are mentioning that the assessee has maintained purchase and sales register - This also shows that the assessee has done business in shares there is no reason to interfere in the findings of the CIT(A) - The gains arising out of share transaction have been rightly taxed under the head profits and gains of business or profession. Computation of profits Held that - The profits the profit of the assessee arising out of the transactions in shares is to be treated as business income the AO is directed to recompute the profit after allowing all the expenses directly related to this business of the assessee AO is further directed to adopt the value of stock of shares at cost or market price whichever is lower. Disallowance u/s 14A of the Act Held that - As the matter is already restored to the AO thus, The AO is directed to make a reasonable disallowance u/s. 14A of the Act without applying Rule 8D for the treatment of capital gains under the head business income after giving a reasonable opportunity of being heard to the assessee Decided in favour of Assessee.
Issues:
1. Classification of short term capital gain as business income. 2. Application of principles for computing business income. 3. Disallowance under section 14A of the Act. Issue 1: Classification of short term capital gain as business income: The appeal was against the order of the Ld. CIT(A) confirming the AO's treatment of short term capital gain as business income for A.Y. 2007-08. The AO relied on CBDT Circular No. 4 of 2007 to distinguish shares held as investment from stock-in-trade. The assessee contended that the shares were held as investments, supported by the balance sheet. The AO rejected this, citing short holding periods. The Ld. CIT(A) upheld the AO's decision, emphasizing the intention to derive regular income from transactions. The ITAT analyzed the Memorandum of Association, noting the absence of income related to the main object of the company. The ITAT dismissed the appeal, considering the company's history of income solely from share transactions. Issue 2: Application of principles for computing business income: The ITAT directed the AO to recompute the profit from share transactions as business income, allowing direct expenses and valuing stock at cost or market price. The AO was instructed to provide a reasonable opportunity for the assessee to be heard before making the decision. Issue 3: Disallowance under section 14A of the Act: The ITAT restored the issue of disallowance under section 14A back to the AO, along with the computation of business income. The AO was directed to make a reasonable disallowance without applying Rule 8D, considering the treatment of capital gains as business income and providing a fair hearing to the assessee. In conclusion, the ITAT partially allowed the appeal for statistical purposes, emphasizing the correct classification of short term capital gain as business income and the reevaluation of related principles for computing business income and disallowance under section 14A. The judgment aimed at ensuring a fair assessment process and compliance with relevant legal provisions.
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