2014 (1) TMI 1534 - AT - Income Tax

Income from sale of shares - Capital gains or business income - Held that - The assessee has been investing in shares in earlier years and Revenue has accepted the same as income from capital gains - Following the Rule of Consistency the same should be accepted in this year also - In the absence of any material change, the Revenue should not have taken a different view - Decided against Revenue. Interest income - Income from business or income from other sources - Held that - The assessee has been disclosing interest income consistently as business income - The department has also accepted the same and completed the assessment u/s 143(3) of the Act accepting interest income as business income for the AYs 2003-04, 2004-05 and 2005-06 - There is no change in circumstances of the year under consideration - The CIT(A) has rightly treated the interest income as business income and we confirm the same - Decided against Revenue. Applicability of Rule 8D - Held that - Relying upon the decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective - Since the assessment year involved is 2007-08 therefore I hold that Rule 8D will not apply - In certain recent decisions Hon'ble ITAT Kolkata it has been held that expenses to the tune of 1% of the exempt income can be disallowed u/s. 14A - Decided against Revenue. Disallowance of interest payment u/s 14A - Held that - The payment of interest amounting to ₹ 92,69,529/- has direct nexus and is directly attributable to a particular income, i.e., business income on shares sold held as stock-in-trade - The provisions of Rule 8D(2)(i ) are very clear that the expenditure on account of payment of interest would be covered in the said Rule only if it s not directly attributable to any particular income or receipt - The interest payment cannot be considered under Rule 8D(2)(ii) - The CIT(A) has rightly deleted the addition - Decided against Revenue.

Summary

Issues Involved:
1. Classification of income from sale of shares as capital gains vs. business income.
2. Classification of interest income as business income vs. income from other sources.
3. Disallowance of expenses incurred for earning exempt income under Section 14A read with Rule 8D.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue was whether the income from the sale of shares should be treated as capital gains or business income. The Assessing Officer (AO) treated the income as business income due to the frequency and nature of transactions, suggesting a trading motive. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the tribunal observed that the assessee consistently treated these shares as investments in previous years, and the revenue had accepted this classification. The tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and the intention of the assessee at the time of acquisition. The tribunal noted that the assessee earned substantial dividend income and held shares for significant periods, supporting the investment motive. Past judicial pronouncements, such as the Supreme Court's rulings in CIT vs. Madan Gopal Radheylal and CIT vs. Associated Industrial Development Co. Ltd., were cited to reinforce that the intention and treatment in books of accounts are crucial in determining the nature of income.

2. Classification of Interest Income:
The AO classified the interest income as income from other sources, while the assessee claimed it as business income. The CIT(A) and the tribunal found that the assessee consistently disclosed this income as business income in previous years, and the revenue had accepted it. The tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Radhasoami Satsang vs. CIT, which supports the principle of consistency in the absence of any material change in facts. The tribunal concluded that the interest income should be treated as business income due to the organized manner in which the assessee conducted the lending activities, akin to a money-lending business.

3. Disallowance of Expenses under Section 14A read with Rule 8D:
The AO disallowed expenses incurred for earning exempt income, applying Rule 8D. For AY 2006-07 and 2007-08, the tribunal noted that Rule 8D is applicable prospectively from AY 2008-09, as held by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The CIT(A) restricted the disallowance to 1% of the exempt income for these years. For AY 2008-09, the CIT(A) reduced the disallowance made by the AO, recognizing that substantial interest expenses were directly attributable to business income from IPO-related borrowings. The tribunal upheld the CIT(A)'s decision but set aside the issue of disallowance under Rule 8D(2)(i), 8D(2)(ii), and 8D(2)(iii) for fresh adjudication by the AO, as the nexus between the expenses and taxable income needed re-examination.

Conclusion:
The tribunal dismissed the revenue's appeals and partly allowed the assessee's appeals and cross-objections, emphasizing the principles of consistency, the intention behind transactions, and the proper attribution of expenses. The tribunal's decisions were grounded in established judicial precedents and careful consideration of the facts and circumstances of each case.