2017 (4) TMI 1351 - AT - Income Tax

Nature of income - Long Term Capital Gains or busniss income - share transactions - period of holding - Held that - There is no dispute on the fact that the shares in question are undisputedly long term capital assets within the meaning of section 2(29)(b) r.w.s 2(29)(a) and 2(42)(a) (b) of the Act. The period of holding constitutes the determining factor conclusively so far as the said definitions relating to the short term and long term capital loss and the short term and long term capital gains. Considering the above CBDT Circular as well as the precedents in the matter we are of the opinion the order of the CIT (A) on this issue of LTCG is fair and reasonable and it does not call for any interference. Accordingly we affirm the view of the CIT (A). Short term capital gain - STCG should be treated as business income of the assessee - Held that - The view of the AO in treating the LTCG and STCG as business income of the assessee is not proper. Considering statutory provisions regarding the definition of LTCG we are convinced that the views of CIT (A) are sustainable. Similarly regarding the claim of STCG also we find that (i) the consistency principles; (ii) use of own funds of 54 Crs; (iii) earning of gross dividend income of 1.20 Crs or 30 lakhs on account of short term capital assets; (iv) details given in the contract notes regarding intention of certain shares in physical form etc. suggest that the STCG in question cannot be held as business income. Addition u/s 14A - Held that - Applying the provisions of Rule 8D(2) of the Rules creates a absurdity to the facts of the present case. Considering the same in our view as fairly mentioned by the Ld Counsel for the assessee disallowing 2% taking spirit from the said judgment of the Bombay High Court in the case of Godrej Agrovet 2014 (8) TMI 457 - BOMBAY HIGH COURT should meet the ends of justice. Accordingly we order and direct the Assessing Officer to restrict the disallowance to 2% of the exempt income.

Summary

Issues Involved:
1. Classification of income as business income or capital gains.
2. Applicability of Section 14A read with Rule 8D of the Income Tax Act for disallowance of expenditure.

Detailed Analysis:

1. Classification of Income as Business Income or Capital Gains:

Long Term Capital Gains (LTCG):
The assessee reported LTCG of ?2,65,78,528/- and claimed exemption under Section 10(38) of the Income Tax Act. The Revenue argued that the assessee's transactions indicated a systematic and organized activity with a profit motive, thus classifying the gains as business income. However, the CIT (A) allowed the assessee's claim, treating the gains as LTCG. The Tribunal upheld this decision, referencing CBDT Circulars No. 4/2007 and 6/2016, which allow for the classification of shares held for more than 12 months as capital assets if the assessee desires. The Tribunal found no reason to interfere with the CIT (A)'s order, affirming that the shares in question were long-term capital assets as per the statutory definitions.

Short Term Capital Gains (STCG):
The assessee reported STCG of ?1,53,54,744/-, applying concessional rates specified under Section 111A of the Act. The Revenue contended that these should be classified as business income due to the nature and volume of transactions. The CIT (A) disagreed, treating the gains as STCG. The Tribunal noted that the assessee consistently maintained separate portfolios for investment and trading, with no evidence of borrowed funds used for these investments. The Tribunal emphasized the principle of consistency, noting that the assessee's treatment of similar gains in previous years had been accepted. The Tribunal upheld the CIT (A)'s decision, rejecting the Revenue's appeal on this issue.

2. Applicability of Section 14A read with Rule 8D:

The AO disallowed ?19,07,147/- under Section 14A read with Rule 8D(2)(iii), attributing this amount to the expenditure incurred for earning exempt income. The CIT (A) confirmed this disallowance. The assessee argued that the AO failed to record satisfaction regarding the correctness of the assessee's claim and that the disallowance exceeded the total expenditure debited in the Profit & Loss Account. The Tribunal found merit in the assessee's argument, noting that the total expenditure claimed was ?16,92,342/-, with ?13,32,012/- attributable to subscription fees unrelated to earning exempt income. The Tribunal directed the AO to restrict the disallowance to 2% of the exempt income, citing the judgment in the case of Godrej Agrovet. This conclusion was specific to the facts of the present case and not intended as a precedent.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s treatment of LTCG and STCG as capital gains. The assessee's Cross Objection was partly allowed, with the disallowance under Section 14A read with Rule 8D restricted to 2% of the exempt income. The order was pronounced in the open court on 12th April, 2017.