2016 (3) TMI 363 - AT - Income Tax

Addition made on account of short term capital gain - treatment to speculation loss as per explanation to section 73 as loss from capital gain - Held that - AO has wrongly held the losses from capital gain as speculation by misinterpreting the provisions of explanation to section 73 of the Act. The first conditions used the words mainly relevant to the income from the specified four heads of income which has to be understood in true legal terms. The dictionary meaning of the word mainly is chiefly, principally, much etc. This is very clear that the aggregate income from the specified four heads should be the main portion of the gross total income of the company. The plain meaning of the word mainly is more than half. It means any element which has the presence of more than half in the total shall be termed as main element. So, if the aggregate income of the four specified heads is more than 50% of the gross total income of a company, it can be said that the company has the main income from the four specified heads. So, if the aggregate income of the four specified heads is 51% and above of the gross total income of a company, it should be said the company has the income mainly from the four specified heads. From the figures put narrated by the Ld AO as reproduced above, it is evident that the gross total income of the company consisted mainly of income which is chargeable under the heads Capital Gains and Income from other sources . Such a Company is exempted from Explanation to Section 73. In view of above we find that the explanation to section 73 of the Act does not apply to assessee - Decided against revenue Disallowance u/s 14A - Held that - Rule 8D r.w.s. 14A(2) can be invoked only if the Assessing Officer having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to tax-free income. The burden Ion the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance under section 14A. There cannot be any presumption that the assessee must have incurred expenditure to earn tax free income. The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO will have to indicate cogent reasons for the same Rule 8D of the IT Rules, comes into play only when the AO records a finding that he is not satisfied with the assessee s method. - Decided against revenue Addition u/s. 68 - Held that - AO has made the addition of the share application money because all the nine companies were having the common address and the notice sent under section 133(6) was received by the single person. Accordingly the AO opined that the assessee has used its unaccounted money in the share application transactions. However we find that all the money received in the form of share capital is duly supported with the requisite document as discussed above. To our mind the basis on which the addition was made by the AO is not tenable. The ld. DR also could not brought anything on record to controvert the findings of the ld. CIT(A). In view of above we find no reason to interfere in the order of the ld. CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition of short-term capital gain and treatment of speculation loss under Section 73.
2. Deletion of disallowance made under Section 14A read with Rule 8D.
3. Deletion of addition made under Section 68 regarding share application money.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of Short-Term Capital Gain and Treatment of Speculation Loss Under Section 73:

The first issue raised by the Revenue is the deletion of the addition made by the Assessing Officer (AO) on account of short-term capital gain of Rs. 14,34,741 and treating the speculation loss as per the explanation to Section 73 of the Income Tax Act, 1961 (the Act) as a loss from capital gain. The assessee, a limited company engaged in the trading of iron and steel, reported various incomes including short-term capital gain from mutual funds. The AO treated the losses from capital gain as speculation loss under the explanation to Section 73, disallowing the set-off against the short-term capital gain from mutual funds.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that the assessee's income mainly came from capital gains and other sources, exempting it from the explanation to Section 73. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the AO misinterpreted the provisions of Section 73 and failed to correctly apply the test of the main income being from specified heads. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the Revenue's ground.

2. Deletion of Disallowance Made Under Section 14A Read with Rule 8D:

The second issue concerns the deletion of disallowance of Rs. 4,08,937 made under Section 14A of the Act. The assessee claimed an exempt dividend income of Rs. 16.03 lakhs and disallowed Rs. 58,611 as expenses related to earning this income. The AO, dissatisfied with the assessee's claim, applied Rule 8D and disallowed Rs. 4,08,937.

The CIT(A) deleted the addition, stating that the AO did not record specific reasons for his dissatisfaction with the assessee's claim, which is a prerequisite for invoking Rule 8D. The ITAT agreed with the CIT(A), emphasizing that the AO must first examine the assessee's claim and provide cogent reasons for any dissatisfaction before applying Rule 8D. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the Revenue's ground.

3. Deletion of Addition Made Under Section 68 Regarding Share Application Money:

The third issue involves the deletion of an addition of Rs. 1.83 crores made under Section 68 of the Act. The assessee received Rs. 4 crores as share application money from 25 companies, with nine companies having the same address. The AO suspected that the assessee introduced its undisclosed income as share application money and added Rs. 1.83 crores to the total income.

The CIT(A) deleted the addition, noting that the AO's suspicion was based on flimsy grounds and that the assessee provided sufficient documentary evidence to support the identity, genuineness, and creditworthiness of the share applicants. The ITAT upheld the CIT(A)'s decision, finding that the AO's basis for the addition was untenable and unsupported by material evidence. The Tribunal dismissed the Revenue's ground.

Conclusion:

The ITAT dismissed the Revenue's appeal on all grounds, upholding the CIT(A)'s decisions on the deletion of additions related to short-term capital gain and speculation loss, disallowance under Section 14A, and share application money under Section 68. The Tribunal emphasized the need for proper interpretation and application of legal provisions and the requirement for the AO to provide specific reasons for any dissatisfaction with the assessee's claims.