2015 (1) TMI 1154 - AT - Income Tax

Disallowance u/s 14A r.w.Rule 8D - whether investment in shares and securities have been made out of borrowed funds, therefore, the provisions of s.14A are applicable? - Held that - We uphold the finding of the First Appellate Authority that the income received from the sale and purchase of shares is to be taxed under the head income from capital gains . Hence we dismiss this appeal of the Revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act read with Rule 8D.
2. Classification of income from the sale of shares as either business income or capital gains.

Detailed Analysis:

Issue 1: Disallowance of Expenditure under Section 14A read with Rule 8D
The assessee, a real estate company, filed its e-return of income, and the Assessing Officer (AO) disallowed expenditure of Rs. 4,69,20,004/- related to earning exempt income, invoking Section 14A read with Rule 8D. The First Appellate Authority upheld this disallowance. The assessee contested this, arguing that the disallowance should not exceed the exempt income, referencing the Delhi ITAT decision in Sahara India Financial Corp Ltd. vs. DCIT, which held that disallowance under Section 14A cannot exceed the tax-free income.

The Tribunal noted that the assessee had shown tax-free dividend income of Rs. 28,832/- and disallowed expenditure of Rs. 4,69,20,004/-. It referred to the jurisdictional High Court's decision in M/s Holcim India P. Ltd., which stated that Section 14A cannot be invoked when no exempt income is earned. Following these precedents, the Tribunal restricted the disallowance under Section 14A to Rs. 2,81,832/-.

Issue 2: Classification of Income from Sale of Shares as Business Income or Capital Gains
The Revenue appealed against the First Appellate Authority's decision to treat the income from the sale of shares as capital gains instead of business income. The Tribunal examined several factors to determine the nature of the income:
- The assessee is primarily engaged in the real estate business and occasionally invests in shares and securities.
- Investments in shares and mutual funds were shown separately in the balance sheet.
- In previous years, the income from the sale of shares was treated as capital gains and accepted by the department.
- The transactions were delivery-based, and the holding period for long-term capital gains was more than 12 months.
- The assessee did not engage in frequent trading or speculative transactions.

The Tribunal referred to several case laws, including G. Venkateswami Naidu and Co. vs. CIT and CIT vs. Rohit Anand, which emphasized the intention behind the transactions, the treatment in books of accounts, and the frequency of transactions. The Tribunal upheld the First Appellate Authority's finding that the income from the sale of shares should be treated as capital gains, as the assessee's transactions were consistent with investment activities rather than trading.

Conclusion:
The Tribunal allowed the assessee's appeal in part by restricting the disallowance under Section 14A to Rs. 2,81,832/- and dismissed the Revenue's appeal by upholding the classification of income from the sale of shares as capital gains. The decision was pronounced in the open Court on 28th January 2015.