2014 (4) TMI 660 - AT - Income Tax

Restriction of disallowance of interest expenses u/s 14A of the Act Held that - CIT(A) has given relief to the assessee in view of the undisputed fact that assessee was having interest free funds against the investment in shares - there was no finding of AO that interest bearing funds were utilized by the assessee in making investments in shares resulting in tax free income relying upon CIT vs. Jayesh Budhalal Mehta 2010 (2) TMI 1056 - GUJARAT HIGH COURT - if assessee has sufficient interest free funds and AO having have not brought any material on record to prove that interest bearing funds were utilized in making investments in assets resulting in tax free income then no disallowance could be made - disallowance to the extent of Rs. 89,550/- has been retained by the Ld. CIT(A) in view of the fact that assessee himself had estimated the administrative costs attributable to dividend income at Rs. 89,550 thus, there is no need to interfere in the order of the CIT(A) Decided against Revenue. Addition of STCG as business profit Held that - Assessee as well as revenue both are in appeal - At the time of hearing counsel of the assessee reiterated the submissions made before lower authorities and also highlighted certain portion of those submissions and relied upon case laws - it would not be proper to accept the submissions without getting them verified thus, the matter is required to be remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 14A.
2. Treatment of short-term capital gain as business profit.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 14A:

The primary issue here is the disallowance of interest expenses amounting to Rs. 8,24,392/- under Section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed these expenses on the grounds that they were incurred to earn exempt income, specifically dividend income totaling Rs. 4,90,699/-. The assessee argued that the investments generating this income were made in previous years and no new investments were made during the current year. They further contended that the borrowed funds were used exclusively for their ship-breaking business, and not for earning dividend income. The AO, however, was not satisfied with this explanation and applied Rule 8D to calculate the disallowance.

The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to Rs. 89,550/-, noting that the assessee had sufficient interest-free funds amounting to Rs. 5,59,20,487/- against the investment of Rs. 1,28,52,175/- in shares. The CIT(A) relied on the jurisdictional High Court's decision in CIT vs. Jayesh Budhalal Mehta, which held that no disallowance could be made if the assessee had sufficient interest-free funds and the AO did not prove that interest-bearing funds were used for investments generating tax-free income.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO did not provide evidence that interest-bearing funds were used for the investments in question. The Tribunal also noted that the assessee had estimated the administrative costs attributable to dividend income at Rs. 89,550/-, which justified the CIT(A)'s decision to restrict the disallowance to this amount.

2. Treatment of Short-term Capital Gain as Business Profit:

The second issue concerns the AO's treatment of Rs. 3,22,144/- shown by the assessee as short-term capital gain, which the AO reclassified as business income. The AO observed that the assessee engaged in frequent transactions of purchase and sale of shares, indicating a trading activity rather than an investment activity. The AO referenced CBDT Circular No. 4/2007 and various judicial precedents to support this reclassification.

The CIT(A) directed the AO to treat gains from investments held for less than 30 days as business income, while other gains should be treated as capital gains. The assessee argued that their primary business was ship-breaking, and the shares were held as investments, not trading stock. They maintained detailed records to distinguish between trading and investment activities.

The Tribunal decided that the matter required further verification and remanded it back to the AO for fresh adjudication. The Tribunal emphasized the need for the AO to reassess the nature of the transactions and provide the assessee another opportunity to substantiate their claim that the short-term gains were indeed capital gains and not business income.

Conclusion:

Both appeals, one concerning the disallowance under Section 14A and the other regarding the treatment of short-term capital gains, were partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decision on the disallowance of interest expenses but remanded the issue of short-term capital gains back to the AO for further verification and adjudication.