2014 (12) TMI 1341 - HC - Income Tax

Disallowance u/s 40A(3) - payment in cash exceeding permissible limits - scope of amendment to act - retrospective effect of amendment - HELD THAT - The proviso 40A(3) prior to amendment only prohibited incurring of expenditure in respect of which a payment is made in a sum exceeding twenty thousand rupees otherwise than by an account payee cheque drawn on a bank or account payee bank draft was not allowed of the deduction, when the law was amended on 1.4.2009 by Finance Act, 2008, when the word aggregate of payments made to a person in a day was incerted. It means till the date even if such payment is made by virtue of the earlier provision, the assessee would not denied the benefit of deduction. When the assessee was enjoying the benefit till the date of amendment, by this amendment tax cannot be levied retrospectively, it would cause great hardship. Therefore, the authority were not justified in holding that the said provision is restrospective and levying taxes on the basis of the said amended provision. In that view, certainly it was not clarificatory in nature. Therefore, the first substantial question of law is answered in favour of the assessee Income from sale of shares - busniss income or short term capital gain - correct head of income - HELD THAT - The assessee is an ayurvedic Doctor and he is in the business of purchase and sale of ayurvedic preparations. He has in all invested about 2.2 lakhs rupees in purchase of shares. The evidence on record shows the said investment is not paid from the borrowed capital. When the Tribunal holds a sum of ₹ 16,665/- is to be treated as LTCG and do not fall under the heading of Income from business or profession, we do not find any justification to bring the remaining income under the said head. No logic or reason for making the distinction. In the facts of this case, we are satisfied that the Income derived by the assessee from sale of shares would not fall within the head of Income from business or profession and therefore, the impugned order passed by the Tribunal is hereby set aside. - Decided in favour of assessee.

Summary

Issues: Interpretation of retrospective amendment under Section 40A(3) and classification of income from sale of shares as business income.

Interpretation of Retrospective Amendment (Section 40A(3)):
The appellant, an individual dealing in ayurvedic medicines, filed an appeal against the Tribunal's order treating the income derived from the sale of shares as business income and upholding the retrospective application of the amendment to Section 40A(3) of the Income Tax Act. The Court analyzed whether the amendment, effective from 1.4.2009, could be considered retrospective or prospective. Referring to the case law, the Court emphasized that retrospective application should not impose undue hardship on the assessee. The Court noted that the amendment introduced the term "aggregate of payments" to a person in a day, affecting the deduction of expenses exceeding twenty thousand rupees. It concluded that since the appellant was entitled to the benefit before the amendment, imposing taxes retrospectively would cause hardship. Therefore, the Court ruled in favor of the appellant, holding that the provision was not clarificatory and should not be applied retrospectively.

Classification of Income from Sale of Shares:
The Court examined whether the income derived by the appellant from the sale of shares should be assessed as business income or short-term capital gains. The appellant, an ayurvedic doctor, had invested in shares without borrowed capital. The Tribunal had classified a portion of the income as long-term capital gains but considered the remaining income as business income. The Court found no justification for this distinction and held that the income from the sale of shares did not fall under the category of income from business or profession. Consequently, the Court set aside the Tribunal's order and ruled in favor of the appellant. The Court allowed the appeal, setting aside the impugned order and directed each party to bear their own costs.

In conclusion, the High Court of Karnataka ruled in favor of the appellant on both issues, interpreting the retrospective amendment under Section 40A(3) in a manner that avoided undue hardship and classifying the income from the sale of shares as not falling under the head of business income.