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2018 (8) TMI 1961 - AT - Income TaxCorrect head of income - Characterisation of income - Issue of treatment of long-term capital loss as business loss by treating it as a business income - Period of holding of shares - HELD THAT - We hold that in so far as transaction in sale of shares shown under the head Long Term Capital Gain same cannot be taxed under the head business income especially in the light of the categorical clarification by the CBDT. Simply because the assessee has held the shares for less than period of 12 months it does not straight away put in the bracket of trading activity especially when there is no repetitive transaction of the shares. However in so far as detail of Short Term Capital Gain is concerned the assessee has filed voluminous detail which has been neither examined or looked upon by the Assessing Officer or by the ld. CIT(A) therefore we deem it proper that in so far as transaction of shares shown under the head Short Term Capital Gain matter should be restored back to the file of the Assessing Officer to examine whether there is any repetitive transaction; or whether similar scrips have been shown by the assessee in its trading portfolio; or there is frequent switching of same shares. AO will examine these aspects and will also examine it in the light of the clarification issued by the CBDT vide circular dated 2nd May 2016. Thus with this direction this issue is remanded back for limited purpose; and in so far as transaction of Long Term Capital Gain is concern we hold that same is assessable as Long-Term Capital Gain and not business income. Coming to the objection raised by the ld. CIT-DR that the new plea has been raised with regard to the transaction of Punjab Tractor Ltd. we do not find any merits in such objection because the acquisition of sale of Punjab Tractor Ltd. has been discussed by the Assessing Officer also and moreover if the entire issue of Long-Term Capital Gain whether assessable under the head capital gain or business income is in dispute and if certain facts are being pointed out from the material already on record then the same can always be examined to see whether it was acquired for the purpose of investment or for the purpose of trading. Thus objection raised by the ld. CIT-DR is rejected. Assessee appeal allowed for statistical purposes. Addition made u/s.14A r.w.r. 8D - HELD THAT - So far as disallowance under Rule 8D2(iii) is concerned it is not in dispute because already assessee has offered more than what is disallowable under the formula given under Rule 8D2(iii). AO has imputed the disallowance of interest without even analyzing the nature of accounts and the fact that assessee has a huge net surplus of interest income which has been offered for tax. The assessee is a NHBC and since the interest payment has been adjusted with the interest received this itself goes to show that assessee is maintaining a separate finance activity and the interest payment is directly relating to such financial activities. Nowhere AO such an interest payment has any co-relation with the loan funds for the purpose of making the investment. On the other hand we find that the assessee has huge surplus funds in its reserve which is around 19, 200 lacs. Under these circumstances it could be easily presumed that investments have been made from interest free surplus funds and no portion of interest expenditure can be disallowed. Accordingly we do not find any infirmity in the order of the ld. CIT (A) and same is confirmed. Treating profit from sale of shares as Long-Term and Short-Term Capital Gains or business income - AY 2008-09 - HELD THAT - As shares which were held for more than 365 days were held as investment from the date of acquisition. We have already held that so far as the shares transacted under the head Long Term Capital Gain the same cannot be held to be for the purpose of trading activity and consequently it cannot be assessed under the head Business Income following the CBDT Circular (supra). On this issue and various judgment of the Hon ble High Court have been followed. In so far as Short-Term Capital Gain is concerned we have given certain directions to the Assessing Officer for examination of certain aspects; therefore for this year also same direction is given to the Assessing Officer. Accordingly appeal for the Assessment Year 2009-10 is treated partly allowed for statistical purposes. Addition of interest under Rule 8D(2)(iii) - HELD THAT - We find that the assessee s contention has been that it always had huge sufficient interest free funds available with it which is also evident from the balance-sheet in the form of huge reserves and surplus and therefore no disallowance of interest could have been made. This contention of the assessee has not been rebutted by the Assessing Officer. Apart from that assessee has also categorically stated that none of its borrowed funds was applied for the purpose of the investment and it has earned interest income of 19.84 crore from the loan advanced by it and has paid interest on loans of 1.98 crores only. Thus there is a net interest income. We have already given a finding while deciding the appeal for Assessment Years 2008-09 that if there is net interest income then no disallowance of interest can be made. Under these circumstances and facts we hold that no disallowance of interest can be made. Accordingly the disallowance made by the Assessing Officer under Rule 8D(2)(iii) is directed to be deleted. TDS u/s 194H on DEMAT charge - Whether no principle agent relationship? - HELD THAT - We find that the only reason for disallowing the payment of DEMAT charges by AO is that the CBDT Notification No.56/2012 has come into effect from 01.01.2013 and therefore for the earlier period TDS is required to be deducted u/s.194H. Such a reasoning for disallowance cannot be sustained because if CBDT has clarified that no TDS is required to be deducted on DEMAT charges then such a clarification brought to remove the rigors and the hardship to the assessee has to be given retrospective effect because the reason given by the CBDT to bring the circular was to reduce the hardship and the compliance cost and it is causing great hardship to the deductee. Such a clarification brought by CBDT to remove the hardship cannot be held that prior to 01.01.2013 such a hardship should be imposed. Accordingly the order of the ld. CIT(A) for deleting the said disallowance is affirmed.
Issues Involved:
1. Classification of income from sale of shares as business income or capital gains. 2. Disallowance under Section 14A read with Rule 8D. 3. Disallowance of DEMAT charges for non-deduction of TDS. Detailed Analysis: 1. Classification of Income from Sale of Shares: The primary issue was whether the income from the sale of shares should be treated as business income or capital gains. The assessee company, involved in the business of sale and purchase of shares and mutual funds, showed income under different heads including long-term and short-term capital gains. The Assessing Officer (AO) reclassified this income as business income based on several factors such as the frequency and volume of transactions, the holding period of securities, and the intention behind the transactions. The AO highlighted that the assessee had a significant turnover in both mutual funds and shares, indicating a business motive rather than an investment intent. The AO also noted that the assessee had converted shares from stock-in-trade to investment in 2004 and had paid interest on borrowed funds used for investments, further supporting the business income classification. The CIT(A) reversed the AO's decision, treating the income as capital gains, citing past favorable decisions for the assessee and the maintenance of separate portfolios for investments and trading activities. The Tribunal upheld the CIT(A)'s decision for long-term capital gains, especially for shares like Punjab Tractors Ltd. and ABN Amro Securities Pvt. Ltd., which were held as investments from the outset. However, for short-term capital gains, the Tribunal remanded the issue back to the AO for further examination of the frequency and nature of transactions. 2. Disallowance under Section 14A read with Rule 8D: The AO disallowed ?57.64 lacs under Section 14A, which was later restricted to ?32.14 lacs by the CIT(A). The AO's disallowance included interest expenses, which the assessee argued were already offset against interest income, resulting in a net interest income. The CIT(A) accepted this argument, noting that the assessee, being a Non-Banking Financial Company (NBFC), had significant reserves and surplus funds, and thus, the interest expenses were not attributable to earning exempt income. The Tribunal upheld the CIT(A)'s decision, confirming that no portion of the interest expenditure could be disallowed under Section 14A. 3. Disallowance of DEMAT Charges for Non-Deduction of TDS: The AO disallowed ?66,998/- paid as DEMAT charges for non-deduction of TDS under Section 194H. The CIT(A) deleted this disallowance, interpreting CBDT Notification No. 56/2012, which clarified that no TDS is required on DEMAT charges, as applicable retrospectively to mitigate hardship. The Tribunal affirmed the CIT(A)'s decision, stating that the clarification should be applied retrospectively to avoid undue hardship. Conclusion: The Tribunal concluded that: - Long-term capital gains should be treated as capital gains and not business income, particularly for shares held as investments from the outset. - The issue of short-term capital gains was remanded back to the AO for further examination. - The disallowance under Section 14A was restricted to ?32.14 lacs, with no further disallowance of interest expenses. - The disallowance of DEMAT charges for non-deduction of TDS was deleted, applying the CBDT notification retrospectively. The appeals for the assessment years 2008-09, 2009-10, and 2011-12 were partly allowed for statistical purposes.
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