2013 (4) TMI 940 - AT - Income Tax

Correct head of income - Income from sale of shares - capital gain or business income - HELD THAT - The Tribunal being a fact finding body, it was not the case of the AO to form an opinion as to how to conduct the share business when the assessee is dealing in shares and held as investment in shares which holding is not disputed by the AO, in so far as, the shares were held for more than one year was acceptable to it. This was considered in the case of CIT vs Gopal Purohit by ITAT Mumbai 2010 (1) TMI 7 - BOMBAY HIGH COURT Even the shares purchased in the same year and sold cannot be considered for taxation as business in so far as the assessee had complied with various govt. regulations to hold the shares as per the guidelines of the SEBI cannot be thrust upon the assessee on the sole opinion of the AO to be rendered as business income. The crux of the finding that the assets which have been held as investments have been sold on account of capital and not for business. We are inclined to hold the issue as covered in favour of the assessee, in so far as, the Revenue has not been able to bring out any controverting material which the ld. Counsel for the assessee has submitted that the case laws cited fairly cover the facts which the ld. CIT(A) accepted and allowed the assessee s appeal who confirmed the returned income on sale of shares as for capital gains. The appeal of the revenue stands dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Revenue has not been able to controvert this fact in so far as the ld. CIT(A) in his order computed the exempted income for taxation u/s 14A of the Act by disallowing the expenditure thereto as per Rule 8D was on the basis of not claiming the expenditure but on the earning of income was misconstrued by him when he chose to consider half percentage of interest paid by the assessee to be considered for participating in the earning of exempted income. In this view of the matter enhancement by the ld. CIT(A) is restricted to ₹ 34,944/- in accordance with the said section. This ground raised by the assessee stands partly allowed. Expenditure disallowed as the earning of sale of investment - whether such expenditure has been incurred for the business of the assessee? - HELD THAT - assessee for this proposition submitted the balance sheet for impugned assessment years when the claim of the expenditure on dealing of the shares has been allowed and are part and parcel of the assessee s business when it was nobodys finding that these expenses are not for the business of the assessee. The ld. Counsel for the assessee has submitted that it is a settled principle in so far as computing the capital gains is not to be considered in a confused manner no expenditure is claimed to reduce the capital gains for reducing the consideration. We do find the contention of the ld. Counsel for the assessee justifiable in so far as the Revenue has not controverted that the expenditure of the claim for the business of the assessee are only for the business of the assessee and has not been claimed as increase in the cost of shares sold as investment. In this view of the matter this ground of the assessee is allowed and the AO is directed to delete the addition

Summary

Issues Involved:
1. Enhancement of assessment by disallowing expenses under Section 14A.
2. Reclassification of income from commission and interest as income from other sources.
3. Disallowance of business expenses claimed in the Profit and Loss account.
4. Classification of profits and gains from shares and mutual fund units as capital gains or business income.
5. Applicability of the principle of "res judicata" in income tax proceedings.

Issue-wise Detailed Analysis:

1. Enhancement of Assessment by Disallowing Expenses under Section 14A:
The assessee contested the enhancement of assessment by the CIT(A), which disallowed Rs. 306,022 under Section 14A, arguing that no expenses were incurred in earning the dividend income and that Rule 8D was not applicable during the assessment year in question. The Tribunal found that the CIT(A) erroneously applied a higher disallowance rate and restricted the disallowance to 1% of the dividend income, amounting to Rs. 34,944.

2. Reclassification of Income from Commission and Interest as Income from Other Sources:
The assessee challenged the CIT(A)'s decision to reclassify income from commission and interest as income from other sources and limit the allowable business expenses to Rs. 100,000. The Tribunal found that the expenses claimed by the assessee were part and parcel of its business activities and should not be arbitrarily disallowed. Therefore, the Tribunal directed the deletion of the Rs. 100,000 addition.

3. Disallowance of Business Expenses Claimed in the Profit and Loss Account:
The CIT(A) disallowed various business expenses claimed in the Profit and Loss account, including salaries, contributions to P.F., rates and taxes, repairs, filing fees, audit fees, depreciation, and interest. The Tribunal held that these expenses were indeed part of the assessee's business operations and should be allowed, as they were not claimed to reduce the capital gains. Consequently, the Tribunal allowed the assessee's appeal on this ground.

4. Classification of Profits and Gains from Shares and Mutual Fund Units as Capital Gains or Business Income:
The Revenue argued that the CIT(A) erred in classifying the profits and gains from shares and mutual fund units as capital gains rather than business income. The Tribunal upheld the CIT(A)'s decision, noting that the assessee held the shares as investments and not as stock-in-trade. The Tribunal referenced several case laws, including CIT vs. Gopal Purohit and CIT vs. R.K. Dhawan, which supported the classification of such profits as capital gains. The Tribunal dismissed the Revenue's appeal on this issue.

5. Applicability of the Principle of "Res Judicata" in Income Tax Proceedings:
The Revenue contended that the CIT(A) erred in accepting the assessee's submission that profits and gains from shares had been assessed under the head capital gains in earlier assessment years, arguing that the principle of "res judicata" is not applicable to income tax proceedings. The Tribunal found that the CIT(A)'s reliance on past assessments was justified, as the facts and circumstances of the case remained consistent. Therefore, the Tribunal dismissed the Revenue's appeal on this ground as well.

Conclusion:
The Tribunal concluded by partly allowing the assessee's appeal, specifically on the disallowance under Section 14A and the reclassification of business expenses. The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s classification of profits and gains from shares as capital gains and rejecting the application of the "res judicata" principle in this context. The order was pronounced on 12.04.2013.