2015 (6) TMI 95 - AT - Income Tax

Sale of shares - business profits or short term capital gains - Held that - Gains derived from the purchase and sale of shares by the assessee is rightly offered to tax under the head capital gains and not business income. The facts show that out of the total short term capital gain of ₹ 1,75,51,496/- the undisputed fact is that an amount of ₹ 1,39,41,555/- was earned on shares which were held by the assessee for more than 30 days. In fact short term capital gain of ₹ 83,56,196/- was earned on shares which were held for more than 4 months. Similarly the assessee earned capital gains of more than ₹ 40 lakhs for shares which were held for more than 5 months. This is not a characteristic of a trader. There are no borrowed funds. The assessee has always classified the purchases as investments in its books of accounts. In the earlier year the assessee has disclosed capital gains and the AO in the order passed u/s 143(3) accepted the same. On this factual matrix we agree with the contentions of the Ld.Counsel for the assessee that the gains in question cannot be assessed under the head income from business. - Decided in favour of assesse. Disallowance of expenditure under Section 14A - whether disallowance is excessive and unreasonable? - Held that - Contention of the assessee is not acceptable that the disallowance restricted and upheld by the CIT(A) was incurred for the maintenance of the legal existence of the assessee company when the assessee company is earning exempt dividend income of ₹ 17,27,369 on the average investment of ₹ 32.81 crore, then the disallowance of ₹ 1,65,196/- under section 14A r/w Rule 8D(iii) being the actual expenses claimed by the assessee cannot be held as unjustified. It is pertinent to note that while the company was created for the purpose of real estate business and had not conducted any business in this regard, then the huge exempt dividend income earned from huge average investment of ₹ 32.8 crore cannot be ignored. On the basis of above noted fact, we safely conclude that the legal existence of assessee company during the year under consideration was maintained for the purpose on investments and as such no other business activity was conducted by the assessee during the period. Hence, in our considered opinion, in this situation there is no requirement of bifurcation of claimed expenses viz. for maintaining the legal existence of company and for making investments in shares. At the same time, we are inclined to hold that the CIT(A) was quite justified and reasonable in restricting the amount of disallowance to the amount of expenses claimed by the assessee - Decided against assesse. Loss on sales of shares - whether loss was also business loss and was to deducted from the total income from business? - Held that - As per calculation of income submitted along with return of income available at page 20 of the paper book, we note that the assessee has shown long term capital loss of ₹ 66,59,311. From bare reading of assessment order, we observe that the issue has not been properly and expressly addressed by the AO while framing assessment order and this issue was not raised by the assessee before the CIT(A) in the first appeal. Hence, we are of the considered view that the contention of the assessee cannot be accepted as the assessee itself has made the claim that the entire income/loss from sale of shares is either long term capital gain or loss or short term capital gain or loss and there was no other business activity of the assessee company during the period under consideration. Hence, as per settled legal position of the Act, the long term capital loss on sale of shares during the year under consideration cannot be deducted and allowed against the business income of the assessee. The AO is directed to provide reasonable treatment to this long term capital loss as per relevant provisions of the Act. - Decided against assesse.

Summary

Issues Involved:
1. Classification of gains from the sale of shares as business income or short-term capital gains.
2. Disallowance of expenditure under Section 14A of the Income Tax Act.
3. Treatment of long-term capital loss on the sale of shares.

Issue-wise Detailed Analysis:

1. Classification of Gains from the Sale of Shares:
The primary issue was whether the gains from the sale of shares should be classified as business income or short-term capital gains. The Commissioner (Appeals) had initially held that gains on shares sold within 30 days of acquisition were business profits, while gains on shares held for more than 30 days were short-term capital gains. The Tribunal, however, disagreed with this bifurcation based solely on the holding period. It was noted that the assessee had consistently treated these shares as investments in its books, there were no borrowed funds used for these investments, and similar gains were accepted as capital gains in previous assessment years. The Tribunal emphasized that no single factor, such as the holding period, should solely determine the nature of the transaction. Hence, the Tribunal concluded that the entire gains from the sale of shares should be assessed under the head of 'capital gains' rather than business income.

2. Disallowance of Expenditure under Section 14A:
The assessee contested the disallowance of Rs. 1,65,196 under Section 14A, arguing that no expenditure was incurred to earn the dividend income. The Tribunal noted that earning exempt income is not a passive activity and involves incidental expenses such as collection, telephone, and management. The Commissioner (Appeals) had restricted the disallowance to the actual expenses claimed by the assessee, which was Rs. 1,65,196, as opposed to the Rs. 16,40,609 calculated by the Assessing Officer using Rule 8D. The Tribunal upheld this restricted disallowance, noting that the assessee's main activity during the year was investment in shares, and thus, the expenses claimed were justified.

3. Treatment of Long-term Capital Loss:
The assessee claimed a long-term capital loss of Rs. 66,59,311 on the sale of shares held for more than one year and sought to deduct this from the total business income. However, the Tribunal observed that this issue was not addressed by the Assessing Officer in the assessment order and was not raised during the first appellate proceedings. The Tribunal noted that since the assessee had classified all income/loss from the sale of shares as either long-term or short-term capital gains/losses, and no other business activity was conducted during the year, the long-term capital loss could not be deducted from the business income. The Tribunal directed the Assessing Officer to provide reasonable treatment to this long-term capital loss as per the relevant provisions of the Act.

Conclusion:
The Tribunal allowed the assessee's appeal in part, holding that the entire gains from the sale of shares should be classified as capital gains and not business income, and upheld the restricted disallowance under Section 14A. The Tribunal dismissed the revenue's appeal and the assessee's claim regarding the deduction of long-term capital loss from business income.