2016 (4) TMI 1050 - AT - Income Tax

Loss from speculation business of sale of shares - long term capital gain or short term capital gain - Held that - We find from the facts of the case that the assessee is NBFC as per section 45-IA of the RBI Act, 1934. The assessee has always taken the value of investment at cost and categorized the investment in shares under the head investment and not as current assets. The assessee has earned dividend income of ₹ 2,87,49,687/- during the year and the same was claimed as exempt u/s. 10(34) of the Act. The assessee during the course of assessment proceedings produced contract notes for sale as well as for purchase of shares of Oriental Bank of Commerce from where the assessee has earned substantial loss on account of short term and long term. The assessee s details in respect of holding period, purchase price, sale price, date of sale, date of purchase is enclosed in assessee s paper book at pages 71 to 76 wherein it can be seen that the period of holding by the assessee of shares of OBC ranged between 556 days to 213 days i.e. between 18 months to 7 months. We also find from the orders of the lower authorities that none of the authorities below has doubted the genuineness of sales or purchases or genuineness of transaction and source of payment, whether received or paid. From these facts we can analyze that the assessee by virtue of being an NBFC is authorised to invest in shares and such a terminology does not indicate that the loss or gains from investments made by assessee is to be treated as business income. The assessee has established that the shares held by it as investment are capital asset and sale of capital asset being shares held as investment for a considerable period i.e. either little less than one year or more than one year are assessable as short term capital gain/loss or long term capital gain/loss and not business income. CIT(A) has rightly deleted the disallowance of loss by holding the assessee as investor and we confirm the same. - Decided against revenue Disallowance u/s. 14A - Held that - For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked. In our view, return of investment cannot be construed to mean expenditure and if it is construed to mean expenditure in the sense of physical spending still the expenditure was not such as could be claimed as an allowance against the profits of the relevant accounting year under Sections 30 to 37 of the Act and, therefore, Section 14A cannot be invoked. Hence, the two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14A - Decided against revenue

Summary

Issues Involved:
1. Treatment of loss from speculation business of sale of shares.
2. Disallowance of expenses related to exempted income under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Loss from Speculation Business of Sale of Shares:
The first issue in the appeal concerns the treatment of the loss from the sale of shares. The Assessing Officer (AO) treated the long-term capital loss of Rs. 3,34,30,136 and short-term capital loss of Rs. 36,39,94,084 as business losses, invoking the explanation to Section 73 of the Income Tax Act. The AO's determination was based on the frequency of transactions, utilization of interest-bearing borrowed funds for purchasing shares, and the nature of the assessee's activities, which were deemed to be trading in shares.

The CIT(A) reversed the AO's decision, noting that the assessee, a non-banking financial company (NBFC), had categorized its investments in shares as long-term investments rather than stock-in-trade. The CIT(A) observed that the assessee had substantial interest-free funds and had earned significant dividend income from these investments, supporting the claim that the transactions were in the nature of investments rather than business activities. The CIT(A) relied on the precedent set by the Bombay High Court in the case of Gopal Purohit and the Delhi High Court in the case of CIT Vs. Consolidated Invest Holding Ltd., which supported the treatment of such transactions as investments rather than trading activities.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's investments were categorized as long-term investments and were valued at cost. The Tribunal noted that the assessee's activities were consistent with those of an investor, not a trader, and the transactions were conducted through recognized stock exchanges with the intent of earning dividend income. The Tribunal also highlighted that the assessee's investment activities were supported by substantial interest-free funds, and the investments were made under the delivery-based segment. Consequently, the Tribunal concluded that the losses arising from the sale of shares should be treated as long-term and short-term capital losses, rather than business losses, and dismissed the revenue's appeal on this issue.

2. Disallowance of Expenses Related to Exempted Income (Section 14A):
The second issue pertains to the disallowance of expenses related to exempted income under Section 14A of the Income Tax Act. The AO computed the disallowance under Rule 8D at Rs. 71,20,710, while the assessee had itself computed the disallowance at Rs. 33,57,610. The CIT(A) restricted the disallowance to Rs. 34,63,114, which was the total expenditure debited in the Profit & Loss (P&L) account for the financial year.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient own funds to make the investments and had not utilized borrowed funds for this purpose. The Tribunal referred to the Supreme Court's decision in the case of CIT Vs. Walfort Shares & Stock Brokers Pvt. Ltd., which established that for Section 14A to apply, there must be a proximate cause for disallowance related to the tax-exempt income. The Tribunal also cited the Punjab & Haryana High Court's decision in the case of CIT Vs. Hero Cycles, which held that disallowance under Section 14A requires a finding of actual expenditure incurred in earning the exempt income.

Given that the assessee's own funds were sufficient for the investments and no borrowed funds were used, the Tribunal found no infirmity in the CIT(A)'s order and confirmed the restricted disallowance of Rs. 34,63,114. The revenue's appeal on this issue was also dismissed.

Conclusion:
The Tribunal dismissed the revenue's appeal on both issues, upholding the CIT(A)'s decisions to treat the losses from the sale of shares as capital losses and to restrict the disallowance of expenses related to exempted income to the actual expenditure debited in the P&L account. The judgment emphasizes the importance of the nature of transactions and the source of funds in determining the appropriate tax treatment.