2015 (8) TMI 408 - AT - Income Tax

Profit earned on redemption of mutual funds - Long Term Capital Gains(LTCG) OR business income - Held that - CIT(A) after detailed discussion of the matter has observed that the assessee company had earned long term capital gains on redemption of mutual funds held for more than 1 year. It had been consistently showing the same as investments and assessed as such for the last couple of years. There was nothing on the record that the assessee had traded in the said mutual units. Following the principle of consistency and in the absence of any evidence that the assessee had acted as a trader in the redemption of mutual funds, he held the assessee as investor and directed the Assessing Officer to treat the same as LTCG. We are unable to agree with the contention of the revenue that since the assessee is primarily an investment company, so the income earned should be treated as business income. Law has been now settled on the point through various judicial decisions that even a company having business in trading in shares or securities can also maintain a separate investment portfolio. We therefore do not find any reason to interfere with the well reason order of the CIT(A) on this issue. - Decided against revenue. Loss in sale and purchase transaction of shares - business loss OR Short Term Capital loss - Held that - The assessee did not carry out any other share transaction during the year. This was the single transaction done by the assessee during the year. The shares of other companies purchased were held as investment. In view of the above explanation given by the assessee, in our view, the action of the lower authorities in treating the said loss resulting from single transaction of sale of shares for which the assessee has given the plausible explanation, cannot be held to be justified. This issue is accordingly decided in favour of the assessee and it is directed that the said loss to be treated as short term capital loss.- Decided against revenue. Disallowance u/s. 14A - Held that - we restore this issue back to the file of the AO with a direction that the AO will give opportunity to the assessee to place on record all the relevant facts including its accounts and then examine the computation/ calculation made in this regard by the assessee having regard to the accounts of the assessee. The AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration. After going through the details provided by the assessee, if the AO will be satisfied with the claim/calculation made by the assessee, then he will assess the income accordingly. However, if the AO does not agree with the computation made by the assessee and in that event, he will have to record his dissatisfaction with reasoning for the same by way of a speaking order, then he will be at liberty to resort to the provisions of Rule 8D - Decided in favour of assessee for statistical purposes.

Summary

Issues involved:
1. Treatment of profit earned on redemption of mutual funds as Long Term Capital Gains (LTCG) or business income.
2. Classification of loss in sale and purchase transaction of shares as business loss or Short Term Capital loss.
3. Disallowance under section 14A of the Income Tax Act.

Detailed Analysis:
1. The first issue pertains to the treatment of profit earned on redemption of mutual funds. The Appellate Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) (CIT(A)) to treat the profit as LTCG instead of business income. The Tribunal noted that the assessee had consistently shown such gains as investments for several years and had not engaged in trading activities. The Tribunal emphasized that even investment companies can maintain separate investment portfolios, and there was no evidence to suggest trading in mutual funds. Therefore, the Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order.

2. The second issue revolves around the classification of a loss in a sale and purchase transaction of shares as business loss or Short Term Capital loss. The assessee contended that the transaction, involving the sale of shares of a single company, was a one-time event carried out by an investment manager. The Tribunal accepted the assessee's explanation that the transaction was a singular occurrence and not indicative of regular trading activities. As other shares were held as investments, the Tribunal ruled in favor of the assessee, directing the loss to be treated as a Short Term Capital loss, overturning the lower authorities' decision.

3. The final issue concerns the disallowance under section 14A of the Income Tax Act. The Assessing Officer (AO) disallowed a portion of dividend income claimed as exempt by applying Rule 8D. The CIT(A) upheld the AO's decision, prompting the assessee to appeal. The Tribunal referred to the decision in 'Godrej & Boyce Manufacturing Co. Ltd.' regarding the application of Rule 8D and the necessity for objective satisfaction by the AO. It observed that the AO did not follow the guidelines for objective satisfaction and straightaway applied Rule 8D without proper reasoning. Consequently, the Tribunal remanded the issue back to the AO, instructing a thorough examination of the claim and accounts of the assessee before resorting to Rule 8D. The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal for statistical purposes.

In conclusion, the Appellate Tribunal's judgment addressed the issues of income classification, loss treatment, and disallowance under section 14A with detailed analysis and legal reasoning, ultimately providing decisions in favor of the assessee on two out of three issues.