2013 (6) TMI 870 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from share transactions as capital gain vs. business income.
2. Disallowance of custodial charges u/s 14A.
3. Disallowance of operating and other expenses u/s 14A.

Summary:

Issue 1: Classification of Income from Share Transactions
The primary issue was whether the income earned from share transactions should be classified as capital gain or business income. The CIT(A) allowed the income to be treated as capital gain, which was challenged by the Revenue. The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently showed investments in shares and mutual funds in the balance sheet and treated them as investments, not stock-in-trade. The Tribunal found no infirmity in the CIT(A)'s order, as the assessee's past assessments also treated similar transactions as capital gains.

Issue 2: Disallowance of Custodial Charges u/s 14A
The Assessing Officer disallowed Rs. 12,55,377/- on account of custodial charges, invoking provisions of section 14A, arguing that these charges were paid for earning exempt dividend income. The CIT(A) restricted the disallowance to 10% of the total charges, amounting to Rs. 1,25,538/-, reasoning that custodial charges were essential for ensuring safe custody of investments, which included both taxable and exempt income. The Tribunal upheld the CIT(A)'s decision, agreeing that only the expenditure attributable to earning exempt income should be disallowed.

Issue 3: Disallowance of Operating and Other Expenses u/s 14A
For the assessment year 2004-05, the Assessing Officer disallowed the entire operating and other expenses of Rs. 8,87,242/-, claiming they were incurred for earning exempt income. The CIT(A) restricted the disallowance to 10% of the expenses, amounting to Rs. 83,840/-, noting that these expenses were for routine office maintenance and earning other taxable income. The Tribunal upheld the CIT(A)'s decision, finding the reasoning sound and consistent with the facts.

Conclusion:
The Tribunal dismissed all appeals by both the assessee and the Revenue, upholding the CIT(A)'s decisions on all issues. The income from share transactions was to be treated as capital gains, custodial charges disallowance was restricted to 10%, and operating expenses disallowance was also limited to 10%.