2016 (5) TMI 470 - AT - Income Tax

Sale of shares - Short Term Capital Gain OR business income - Held that - It cannot be said that assessee was only a trader in shares because assessee has clearly demarcated the transactions in his books of account, which proves that he was an investor in shares and securities upto end of F.Y. 2006-07 and commenced the business of shares and securities during Asst. Year 2008-09 i.e. F.Y. 2007-08. However, shares and securities held upto 31.3.2007 were sold during financial year 2007-08 and income earned from sale of such investments were shown as short term and long term capital gain. We, therefore, hold that the short term capital gain should be accepted and there is no reason to interfere with the order of ld. CIT(A) and we uphold the same - Decided against revenue Addition made u/s 14A r.w. rule 8D - Held that - AO has just made an estimated disallowance u/s 14A r.w.rule 8D at ₹ 11,598/- without examining the books of account so to satisfy himself with expenditure incurred in relation to earning dividend income which has not been added back by the assessee neither he has made a proper calculation with respect to provisions of section 14A r.w.rule 8D. We, therefore, are of the view that ld. CIT(A) has rightly deleted the disallowance of ₹ 11,598/- u/s 14A r. w. rule 8D as Assessing Officer has made ad hoc disallowance of equal amount of the exempt income at ₹ 11,598/- - Decided against revenue

Summary

Issues Involved:
1. Treatment of income from the sale of shares as Short Term Capital Gain or business income.
2. Deletion of disallowance made under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Treatment of Income from Sale of Shares:
The primary issue was whether the income of ?2,04,87,755/- from the sale of shares should be treated as Short Term Capital Gain or business income. The Assessing Officer (AO) treated it as business income due to the frequent and voluminous transactions and the audit report indicating the assessee's engagement in trading shares and securities. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, considering the small number of transactions (54) and the treatment of shares as investments in the balance sheet. The CIT(A) referenced CBDT Circular No. 4/2007 and judicial precedents, including the Mumbai High Court's decision in Gopal Purohit v/s. JCIT and the Lucknow ITAT in Sarnath Infrastructure Pvt. Ltd. v/s. ACIT, which allowed maintaining separate portfolios for investment and business activities. The Tribunal upheld the CIT(A)'s decision, noting that the shares were held as investments and the transactions were delivery-based, thus qualifying as capital gains.

2. Deletion of Disallowance under Section 14A read with Rule 8D:
The AO made a disallowance of ?11,598/- under Section 14A read with Rule 8D, corresponding to the dividend income claimed as exempt by the assessee. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision, noting that the AO had made an ad hoc disallowance without properly examining the books of account or making a proper calculation as per the provisions of Section 14A read with Rule 8D.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to treat the income from the sale of shares as Short Term Capital Gain and to delete the disallowance made under Section 14A read with Rule 8D. The Tribunal emphasized the importance of consistent treatment of transactions and the necessity for proper examination and calculation when making disallowances.