2016 (7) TMI 171 - AT - Income Tax

Profit derived from share trading - business income OR long term capital gain exempt u/s 10(38) - Held that - Once the assessee was consistently showing the shares as its investment, the same cannot be converted into stock-in-trade, unless the intention is proved otherwise. Ld. CIT(A) has pointed out that from the record it is evident that assessee company had distinct port-folio of shares and mutual funds under two categories i.e. investments and stock-in-trade. He has observed that during the last few years too the assessee company had followed the same practice of holding certain shares under the head Investment and some shares as Stock in trade . Therefore, as the assessee was holding the shares as investment consistently and the same were acquired out of own funds, there was no reason to treat the same as business income. - Decided against revenue Applicability of section 14A - Held that - In view the decision of Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT held that though Rule 8D was not applicable but since administrative and personal expenses must have been incurred to earn exempt income, determined the disallowance at ₹ 63,352/-. Having heard both the parties, we do not find any reason to interfere with the order of ld. CIT(A) on this count, as he has made a reasonable disallowance of 5% of the expenditure incurred under the head administrative and personal expenses - Decided against revenue Addition of deemed dividend u/s 2(22)(e) - Held that - Admittedly, the assessee was not a shareholder of Radhika Securities Pvt. Ltd. and, therefore, no deemed dividend could be added in the hands of the assessee company. Accordingly, we see no reason to interfere with the order of ld. CIT(A) in deleting the addition - Decided against revenue

Summary

Issues Involved:
1. Whether the CIT(A) was justified in deleting the disallowance made by the AO by treating the profit derived from share trading as business income instead of long-term capital gain.
2. Whether the CIT(A) was justified in deleting the addition made under section 14A for disallowance of expenses related to exempt income.
3. Whether the CIT(A) was justified in deleting the addition under section 2(22)(e) for deemed dividend on account of loans received.

Detailed Analysis:

Issue 1: Deleting the Disallowance by Treating Profit from Share Trading as Business Income
Assessment Year 2005-06:
- The AO treated the profit from share trading as business income, citing that the assessee was engaged in share trading, both delivery-based and non-delivery based.
- The assessee argued that the shares were held as long-term investments and classified as such in the accounts, with investments made from own funds.
- The CIT(A) referred to CBDT Circular No. 4/2007 and relevant case laws, concluding that the profit from the sale of shares should be assessed as capital gain.
- The ITAT upheld the CIT(A)'s decision, noting that the assessee consistently held shares as investments and followed a consistent practice of holding shares under "Investment" and "Stock in trade."

Assessment Year 2006-07:
- Similar facts were presented as in AY 2005-06, where the AO treated the gains from share trading as business income.
- The ITAT upheld the CIT(A)'s decision to treat the gains as capital gains, following the same reasoning and consistency principle as in AY 2005-06.

Assessment Year 2007-08:
- The AO again treated the profit from share trading as business income.
- The CIT(A) followed the order for AY 2005-06, allowing the assessee's claim.
- The ITAT upheld the CIT(A)'s decision, reiterating the same reasoning as in the previous years.

Issue 2: Deleting Addition under Section 14A for Disallowance of Expenses Related to Exempt Income
Assessment Year 2006-07:
- The AO applied Rule 8D(2)(iii) and determined the disallowance under section 14A at ?1,01,510/-.
- The CIT(A) referred to the decision of the Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT and made a reasonable disallowance of 5% of administrative and personal expenses, amounting to ?63,352/-.
- The ITAT upheld the CIT(A)'s decision, finding no reason to interfere.

Assessment Year 2007-08:
- The AO determined the disallowance under section 14A at ?16,35,393/-.
- The CIT(A) again referred to the Godrej & Boyce decision and made a reasonable disallowance of 5% of administrative and personal expenses, amounting to ?37,830/-.
- The ITAT upheld the CIT(A)'s decision, finding no reason to interfere.

Issue 3: Deleting Addition under Section 2(22)(e) for Deemed Dividend on Account of Loans Received
Assessment Year 2007-08:
- The AO made an addition of ?15,34,349/- as deemed dividend under section 2(22)(e), observing that the assessee received a loan from a group company where both companies had common shareholders with substantial interest.
- The CIT(A) deleted the addition, referring to the Special Bench decision in Bhaumik Color Pvt. Ltd. Vs. ACIT, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company.
- The ITAT upheld the CIT(A)'s decision, also referring to the Hon’ble Delhi High Court decision in CIT Vs. Ankitech P. Ltd., which supported the CIT(A)'s conclusion that the loan received by the assessee company from another company could not be treated as deemed dividend since the assessee was not a shareholder of the lender company.

Conclusion:
All three appeals by the revenue for the assessment years 2005-06, 2006-07, and 2007-08 were dismissed. The ITAT upheld the CIT(A)'s decisions on all issues, including the treatment of profits from share trading as capital gains, disallowance of expenses under section 14A, and deletion of addition under section 2(22)(e) for deemed dividend.