2019 (1) TMI 1780 - AT - Income Tax

Correct head of income - Characterisation of income - Issue of treatment of long-term capital loss as business loss by treating it as a business income - HELD THAT - Respectfully following the precedents of the earlier years 2018 (8) TMI 1961 - ITAT DELHI and as a principle of consistency, we uphold the order of the CIT(A) that long term capital gain/capital loss cannot be treated as business income or loss and also long-term capital gain cannot be treated as business income. Accordingly, ground No. 1 raised by the revenue stands dismissed. Disallowance u/s 14A - HELD THAT - CIT(A) following the order of the earlier year has deleted the said disallowance of interest this issue has come up for consideration before the Tribunal in the earlier years and in so far as disallowance of interest is concerned, Tribunal has held that once assessee has huge surplus funds which exceeds the investment then no interest can be disallowed. Accordingly order of the Ld. CIT(A) deleting the disallowance of interest is upheld. - Decided against revenue.

Issues Involved:

1. Treatment of long-term capital loss and short-term capital gain.
2. Disallowance under Section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Treatment of Long-Term Capital Loss and Short-Term Capital Gain:

The Revenue challenged the CIT(A)'s decision to treat ?23,00,136/- as long-term capital loss and ?1,73,93,856/- as short-term capital gain, arguing that these should be considered business income based on the principle of consistency. The CIT(A) had allowed the assessee's claim, following the treatment in previous years. The Tribunal examined whether the income classified as capital gain by the assessee should be treated as business income. The Tribunal noted that the assessee, a Non-Banking Financial Company (NBFC), segregated its income from business and capital gains, maintaining separate portfolios for trading and investment.

The Tribunal found that shares of Punjab Tractors Ltd. and ABN Amro Bank were always held as investments and not stock-in-trade. The shares were acquired for controlling interest and were not intended for trading. The Tribunal highlighted that the shares were held for more than a year, which supports the classification as long-term capital gains. The Tribunal also referred to CBDT Circulars No. 6/2016 and subsequent clarifications, which support treating shares held for more than 12 months as capital gains.

The Tribunal concluded that the long-term capital gains should not be treated as business income, following the principle of consistency and the CBDT circulars. However, for short-term capital gains, the Tribunal remanded the matter back to the Assessing Officer to examine if there were repetitive transactions or frequent switching of shares, following the guidelines of the CBDT circular dated 2nd May 2016.

2. Disallowance under Section 14A read with Rule 8D:

The Revenue also contested the deletion of disallowance under Section 14A read with Rule 8D amounting to ?38,19,939/-. The CIT(A) had deleted the disallowance, noting that the assessee had sufficient surplus funds to make the investments. The Tribunal observed that the assessee's balance sheet showed surplus funds of ?369.44 crores against total investments of ?66.02 crores, with loan funds reduced to ?1.02 crores as of 31st March 2010. Therefore, no disallowance of interest under Rule 8D could be justified.

The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee had made investments out of surplus funds and not borrowed funds. The Tribunal also noted that the indirect expenditure under Rule 8D(2)(iii) was disallowed by the assessee itself, amounting to ?27,90,774/-.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision on both issues. The long-term capital gains were not to be treated as business income, and the disallowance under Section 14A read with Rule 8D was correctly deleted. The order was pronounced on 2nd January 2019.

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