2016 (5) TMI 858 - AT - Income Tax

Taxation of income from Short Term Capital Gain and Long Term Capital Gain at special tax rate u/s 111(A) & 112 - business of activities in shares and securities - Held that - The intention of the circular is clearly to reduce the litigation and maintain consistency. The submissions of the Ld. DR that the transaction was very much voluminous and, therefore, Assessing Officer by taking into the modus operandi of the assessee treated the same as business income but the Assessing Officer has not given the day to day transaction in its entire order and that for how much period the assessee was holding the shares and selling the same is missing in the assessment order. In-fact, in earlier assessment years, the Revenue allowed the Long Term Capital Gain to the assessee and thus the same was treated as capital gain during the earlier years by taking cognizance of circular dated 4/2007 dated 15/6/2007. The assessee has also shown Short Term Capital Gain in this particular year. The case law which was cited by the Ld. DR is not applicable to the facts of the present case because in that case the shares were held for only two to three days period but the assessee s situation in the present case is totally different. The CIT (A) has taken into cognizance of these factors and rightly treated the same as short term capital gain and in fact CIT(A) has taxed certain amount after examining all the transactions related to share trading. The assessee s profit and loss account clearly states that the assessee was having two portfolios. Therefore, this ground of Revenue is dismissed. - Decided against revenue Disallowance u/s 14A - CIT(A) restricted the disallowance to 10% of the exempted income - Held that - The Assessment Year involved in 2007-08 therefore Rule 8D is not applicable in this year as per the ratio laid down in the judgment of Hon ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company (2010 (8) TMI 77 - BOMBAY HIGH COURT ). In our opinion, the CIT(A) has rightly taken into cognizance that the said judgment also held that where investment has been made and the income from the same was exempt from tax thus, the A.O is duty bound to make the disallowance u/s 14A by adopting a reasonable basis. The CIT(A) has rightly restricted the disallowance to the extent of 10% of exempted income. Thus, this ground of the Revenue is also does not survive.- Decided against revenue

Summary

Issues:
1. Tax treatment of Short Term and Long Term Capital Gain from shares.
2. Disallowance under section 14A of the Income Tax Act.

Analysis:

Issue 1: Tax treatment of Short Term and Long Term Capital Gain from shares:
The appeal was filed by the Revenue against the order passed by CIT(A)-XVII, New Delhi. The Revenue contended that the CIT(A) erroneously held that the income from Short Term Capital Gain and Long Term Capital Gain from shares should be taxed at special tax rate under sections 111(A) and 112 of the IT Act, 1961, rather than being considered as business income. The Assessing Officer observed that despite the assessee mentioning shares as investments in its books, the nature of transactions indicated frequent sale and purchase activities. The Assessing Officer relied on Circular No. 4/2007 and instructions from CBDT to treat the gains as business income. The CIT(A) held that Long Term Capital Gains were consistently treated as capital gains in previous years, thus partly allowing the ground related to Long Term Capital Gain. The Revenue argued that the volume and nature of transactions indicated a business activity, supporting the Assessing Officer's decision. However, the CIT(A) and the assessee argued that the transactions did not align with the cited case law, and the assessee had two distinct portfolios, leading to the dismissal of the Revenue's appeal.

Issue 2: Disallowance under section 14A of the Income Tax Act:
Regarding the disallowance under section 14A, the Revenue contended that the disallowance should not have been restricted to 10% of the exempted income. The CIT(A) relied on a decision of the Bombay High Court and held that the Assessing Officer must adopt a reasonable basis for disallowance under section 14A. The CIT(A) restricted the disallowance to 10% of the exempted income. The Revenue's argument that Rule 8D should apply was rejected based on the judgment of the Bombay High Court, which stated that Rule 8D was not applicable for the assessment year in question. The CIT(A)'s decision to restrict the disallowance was upheld, leading to the dismissal of the Revenue's appeal.

In conclusion, the appeal of the Revenue was dismissed, and the order was pronounced on May 19, 2016.