2016 (4) TMI 32 - AT - Income Tax

Transaction in shares/mutual fund by engaging PMS - whether an investment activity and resultant gain/loss was assessable under the head Capital Gains or business income - Held that - The issue stands decided in favour of the assessee and against the revenue by the decision of the Tribunal in assessee s own case for A.Y.2008-09 which has been followed by the CIT(A) that activity of transaction in shares/mutual funds by engaging PMS was an investment activity and therefore the resultant gain was assessable under the head capital gains. Accordingly, the appeals filed by the revenue were dismissed. - Decided in favour of assessee Disallowance u/s.14A - CIT(A) deleted the addition - Held that - No infirmity in the order of the CIT(A). The learned CIT(A) has given a categorical finding that expenditure on PMS has not been claimed by the assessee and there does not remain any other expenditure other than this expenditure, therefore, no disallowance u/s.14A r.w. Rule8D can be made. The above factual finding given by the learned CIT(A) could not be controverted by the learned DR - Decided in favour of assessee Treating the stock-in trade of shares as investment - treatment merely on the basis of a notice of closure u/s.176(3) - Held that - We find identical issue had come up before the Tribunal in the case of the assessee for the A.Y. 2007- 08 wherein held that the finding given by the learned CIT(A) that assessee has duly given the notice of discontinuation of business vide letter dated 7-11-06 filed before the AO on 12-04-06 which is within the prescribed period of time as per section 176(3) of the Income Tax Act could not be controverted by the learned DR. Further it has been categorically submitted by the assessee before the lower authorities that he has discontinued the share trading business and the closing stock in shares as on 31-03-06 has been transferred to his capital account at cost and the same also remains uncontroverted.It has been held by the Mumbai Bench of the Tribunal in the case of ACIT Vs. Bright Star Investment Pvt. Ltd. (2008 (7) TMI 442 - ITAT BOMBAY-H ) that receipt from sale of shares after conversion from stock in trade to investment has to be held as capital gain in absence of provision like sec. 45(2)- Decided in favour of assessee

Summary

Issues Involved:

1. Classification of gains from transactions in shares/mutual funds through Portfolio Management Services (PMS) as capital gains or business income.
2. Disallowance of expenses under Section 14A of the Income Tax Act.
3. Treatment of stock-in-trade of shares as investments post-closure of business.

Issue-wise Detailed Analysis:

1. Classification of Gains from Transactions in Shares/Mutual Funds through PMS:

The primary issue was whether the gains from transactions in shares/mutual funds through PMS should be classified as "Capital Gains" or "Income from business & profession." The Revenue argued that the transactions were systematic and organized, indicating a business activity. However, the CIT(A) and the Tribunal followed the decision in the assessee's own case for A.Y. 2008-09, which held that such transactions were investment activities, and the resultant gains were assessable under the head "Capital Gains." The Tribunal reiterated that the activity of transaction in shares/mutual funds by engaging PMS was an investment activity, and the gains should be assessed under the head "Capital Gains." Thus, the grounds raised by the Revenue were dismissed.

2. Disallowance of Expenses under Section 14A:

The second issue was regarding the disallowance of expenses under Section 14A of the Income Tax Act. The AO had disallowed expenses related to PMS and other charges under Rule 8D. However, the CIT(A) deleted the disallowance, stating that the expenditure on PMS had not been claimed by the assessee, and no other expenditure was incurred for earning exempted income. This position was upheld by the Tribunal, which found no infirmity in the CIT(A)'s order. The Tribunal emphasized that disallowance under Section 14A requires a finding of incurring expenditure, which was not the case here. Consequently, the ground raised by the Revenue was dismissed.

3. Treatment of Stock-in-Trade of Shares as Investments Post-Closure of Business:

The third issue concerned the treatment of stock-in-trade of shares as investments after the closure of the share trading business. The AO had treated the capital loss as business income, arguing that merely showing the stock as investment did not indicate a closure of business. However, the CIT(A) and the Tribunal followed the decision in the assessee's case for A.Y. 2007-08, which held that the receipts from the sale of shares after conversion from stock-in-trade to investment were rightly offered as long-term capital gains. The Tribunal noted that the assessee had duly given notice of discontinuation of business, and the shares were transferred to the investment account at cost. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the ground raised by the Revenue.

Conclusion:

In conclusion, the Tribunal upheld the CIT(A)'s decisions on all issues, dismissing the Revenue's appeal. The gains from transactions in shares/mutual funds through PMS were classified as "Capital Gains," no disallowance under Section 14A was justified as no expenditure was claimed, and the treatment of stock-in-trade as investment post-closure of business was accepted. The appeal filed by the Revenue was dismissed in its entirety.