2016 (3) TMI 87 - AT - Income Tax

Income from sale and purchase of shares - LTCG/ STCG OR business income - Held that - Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been exempt during the year by way of an amendment to the provisions as discussed above, that itself, cannot be a ground for the AO to depart from its consistent stand of treating the assessee as an investor and thereby to charge the income earned by the assessee from share transactions as business income. As discussed above, at the time of purchase of shares even during the year but prior to 01.10.2004, the assessee was not guided or influenced by lower tax rate in case of short term capital gains as the rate for business income and short term capital gains was at par. The assessee, however, was treating himself as an investor and keeping the shares as investments in his account irrespective of the probable tax implication as there were no such tax implications as discussed above. The intention of the assessee, while purchasing the share, is the important and guiding factor as to whether the same was purchased with an intention of investment or for trading. The facts of the case as discussed above, clearly reveal that the assessee had treated the shares as investments in his account. As discussed above, if during the mid of the relevant Financial Year, certain tax benefits have been given in respect of capital gains, that cannot, in any way, lead to an assumption or presumption that the intention of the assessee at the time of purchase of shares was that of a trader and not of an investor. The treatment of the investment in the account books of the assessee was also a relevant guiding factor. The AO has also not pointed out as to in what manner the activity of the assessee for the year under consideration had been changed from investor to that of a trader especially when the department had consistently been treating him as an investor. It is also pertinent to mention here that as discussed above, in subsequent assessment years the department has again accepted the assessee as an investor. It is for the first time that in this year under consideration i.e. A.Y. 2005-06 the assessee had been treated as a trader because of certain tax benefits granted to an investor in securities by way of amendment in the relevant provisions of the Income Tax Act and subsequently for the A.Ys 2006-07 to 2008-09, the assessee was treated as trader.In view of our above discussion of the matter, we are of the view that the assessee is to be treated as an investor for the A.Y. 2005-06 to A.Y. 2008-09 also. We hold accordingly. The AO, therefore, is directed to treat the income from sale and purchase of shares as short term capital gains and long term capital gains according to the period of holding as per the provisions of law for these assessment years also. - Decided against revenue Disallowance under section 14A as per the provisions of rule 8D - Held that - For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee, disallowance under section 14A has to be made on a reasonable basis. We restrict the disallowance u/s 14A in the case of the assessee @ 5% of the tax exempt income earned by the assessee during the year.

Issues Involved:

1. Classification of income from share transactions as capital gains or business income.
2. Disallowance under section 14A of the Income Tax Act.
3. Treatment of loss resulting from forfeiture of deposit.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:

The primary issue was whether the income earned by the assessee from share transactions should be assessed as capital gains or business income. The assessee had claimed the income as capital gains, setting it off against brought forward capital losses. The Assessing Officer (AO) treated the income as business income, citing the volume and frequency of transactions and the use of interest-bearing funds, indicating trading rather than investment.

The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, noting that the assessee had consistently been treated as an investor in previous years (A.Y. 1996-97 to A.Y. 2004-05). The CIT(A) emphasized the principle of consistency and the fact that the change in tax rate for short-term capital gains in A.Y. 2005-06 should not alter the treatment of the assessee's income.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the intention at the time of purchase is crucial and that the department had consistently treated the assessee as an investor in past and subsequent years. The Tribunal concluded that the assessee should be treated as an investor for A.Y. 2005-06 to A.Y. 2008-09, directing the AO to treat the income as short-term and long-term capital gains based on the holding period.

2. Disallowance Under Section 14A:

The assessee's appeal for A.Y. 2005-06 involved the disallowance under section 14A as per Rule 8D of the Income Tax Rules. The appeal was time-barred by 1402 days, but the Tribunal condoned the delay, noting that the assessee had pursued a rectification application under a mistaken belief. The Tribunal proceeded to hear the appeal on merits.

The Tribunal observed that Rule 8D is applicable from A.Y. 2008-09 onwards and disallowance under section 14A for earlier years should be made on a reasonable basis. Following precedents, the Tribunal restricted the disallowance to 5% of the tax-exempt income earned by the assessee during the year.

For A.Y. 2008-09, the Tribunal upheld the CIT(A)'s decision to delete the disallowance made by the AO under section 14A, as the AO had not considered certain expenses already added back by the assessee, and no addition could be made for expenses not claimed as deduction.

3. Treatment of Loss from Forfeiture of Deposit:

The issue was whether the loss from the forfeiture of a deposit given to Calcutta Stock Exchange should be treated as a revenue loss or capital loss. The CIT(A) rectified its earlier order, acknowledging that the deposit was made in the course of business and its forfeiture was incidental to the business. The Tribunal found no infirmity in the CIT(A)'s decision, affirming that the loss was allowable as a business loss.

Separate Judgments:

The Tribunal delivered a common order for all related appeals, addressing the identical facts and issues collectively. The judgments for each issue were consistent across different assessment years and assessees, ensuring uniformity in the treatment of income and disallowances.

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