2016 (8) TMI 152 - HC - Income Tax

Profit on sales of shares - capital gain OR business income - Held that - Assessing Officer without referring to the total transactions and the period for which shares in question were hold, made certain broad general observations. However, Commissioner of Income tax (Appeals) noted that the appellant had shown shares of ₹ 42,000/- of Oriental Bank of Commerce as investment since 01.06.1995 and shares of IPCL worth ₹ 3.26 lacs as investment since 31.03.2001. Share of Alliance Frontline Funds was shown as investment since 01.02.2003. The assessee company had share capital of ₹ 8.45 crores, reserve of ₹ 72.32 lacs. He was therefore of the opinion that looking to the balance sheet in the earlier years as investment and the period of holding of the shares and also that the assessee had invested its own funds and not used borrowed funds for purchase of shares, the sale of shares cannot be taxed as business income. We are in agreement with the view expressed by the Commissioner of Incometax (Appeals) and the Tribunal. Looking to the period for which the shares were held, the number of transactions, the fact that the shares were shown as investments in the books of the assessee since long and that the assessee had not utilized any funds borrowed from purchase of the share, the Assessing Officer committed error in treating the shares as the business income of the assessee. Decided in favour of assessee.

Summary

Issues:
1. Exclusion of sales tax and excise duty for computation of deduction under Section 80HHC of the Income Tax Act.
2. Treatment of profit on sales of shares as "capital gain" instead of "business income."
3. Deletion of proportionate disallowance of interest under Section 14A of the Income Tax Act.

Issue 1: Exclusion of sales tax and excise duty for computation of deduction under Section 80HHC:
The appellant raised the issue of whether the Tribunal erred in excluding sales tax and excise duty for computation of deduction under Section 80HHC of the Income Tax Act despite the insertion of Section 145A. The court referred to previous judgments and held that the components of sales tax and central excise do not form part of sale proceeds for the purpose of Section 80HHC, in line with the decision in Commissioner of Income Tax v. Lakshmi Machine Works. The issue was decided in favor of the assessee.

Issue 2: Treatment of profit on sales of shares as "capital gain" vs. "business income":
The question revolved around the treatment of income derived from the sale of shares as either "capital gain" or "business income." The Assessing Officer treated the income as business income due to the short holding period of shares. However, the Commissioner of Income tax (Appeals) and the Tribunal disagreed, considering factors such as the period of holding, the nature of funds used for investment, and the balance sheet disclosures. They concluded that the sale of shares should be taxed as capital gains, both long term and short term, in favor of the assessee.

Issue 3: Deletion of proportionate disallowance of interest under Section 14A:
The Tribunal deleted the proportionate disallowance of interest under Section 14A of the Income Tax Act, overlooking Rule 8D of the Income Tax Rules. The court referred to previous judgments and agreed that Rule 8D is not retrospective in operation. However, they emphasized that disallowances can still be made under Section 14A by bifurcating expenditure reasonably. The issue was decided against the Revenue in line with previous judgments.

In conclusion, the High Court of Gujarat addressed and analyzed the issues related to the exclusion of sales tax and excise duty for deduction under Section 80HHC, the treatment of profit on sales of shares, and the deletion of proportionate disallowance of interest under Section 14A. The judgments were based on legal principles, precedents, and factual considerations, ultimately ruling in favor of the assessee on all three issues.