2014 (10) TMI 981 - AT - Income Tax

Rebate u/s. 88E - Exclude short term capital gains for the purpose of calculating average rage of tax for determining rebate u/s. 88E - tax rate of business income - Held that - The average rate of income tax is to be applied on the income which is computed under the head profits and gains of business or profession. Such income has to be referred only in the context of meaning given in sub section (1). If the business income of the assessee company is taxed at maximum marginal rate, then rebate is to be allowed for the security transaction tax paid on such income only under section 88E. The short term capital gain is taxed at lower rate under section 111A, but at the same time, no security transaction tax credit is allowed against the same. The tax rate of business income is governed by altogether different provisions of the Act which could not be imported or read into section 88E. The phrase amount calculated by applying the average rate of income tax as used in sub section (2) has to be reckoned as average rate of income tax on business income only. No merit in the ground raised by the Department as the directions given by the learned Commissioner (Appeals) is in accordance with the provisions of the law. - Decided against revenue

Summary

Issues:
1. Calculation of rebate under section 88E based on short term capital gains exclusion.
2. Interpretation of provisions regarding average rate of tax for determining rebate under section 88E.

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner (Appeals) challenging the calculation of rebate under section 88E for the assessment year 2007-08. The main contention was whether short term capital gains should be excluded for computing the average rate of tax for determining the rebate under section 88E. The Commissioner (Appeals) directed to exclude short term capital gains, leading to a revised calculation of the rebate.

2. The Revenue argued that excluding short term capital gains for calculating the average rate of tax would result in always applying the maximum marginal rate of taxation, contrary to legislative intent. They contended that the tax rate should be based on business profit only. However, the assessee's representative justified the exclusion, stating that the purpose of rebate under section 88E is to credit taxes paid on business income, and if taxed at a higher rate, the credit should be based on that rate.

3. The Tribunal analyzed the provisions of section 88E, emphasizing that the deduction of security transaction tax paid is allowed when the total income includes income chargeable under the head "profits and gains of business or profession." The Tribunal interpreted that the average rate of income tax should be applied to business income only, as specified in sub-section (2) of the provision. Therefore, if business income is taxed at the maximum marginal rate, the rebate under section 88E should be based on that rate.

4. The Tribunal concluded that the directions given by the Commissioner (Appeals) were in line with the law, dismissing the Revenue's grounds. It was clarified that the phrase "amount calculated by applying the average rate of income tax" in sub-section (2) of section 88E pertains to business income only. Hence, the exclusion of short term capital gains for determining the rebate under section 88E was upheld, and the Revenue's appeal was dismissed.

In summary, the judgment addressed the calculation of rebate under section 88E concerning the exclusion of short term capital gains and the interpretation of provisions related to the average rate of tax for determining the rebate. The Tribunal upheld the exclusion of short term capital gains for calculating the average rate of tax, emphasizing that the rebate under section 88E should be based on the tax rate applicable to business income, especially when taxed at the maximum marginal rate.