2016 (12) TMI 1421 - AT - Income Tax

Gain from sales of shares - business profit OR short term capital gain - Held that - Assessee has dealt with in 8 scripts out of which in one of the script the assessee has earned a short term capital gain of ₹ 6731272/ and in other scripts there are minor profits or losses and further the assessee has also earned the long-term capital gain of ₹ 64905/-. On appreciation of the about transactions, The Ld. CIT appeal has held that the Scripts, which are held for less than 30 days, shall be chargeable to tax under the head business income relying on the decision of the Dreamland buildTech private limited. Subsequently, in that particular case assessee preferred appeal before the coordinate bench and vide order dated 12/12/2014 wide page No. 15 para No. 8.3 of the order of the appeal of the assessee was allowed and it was held that the entire profits from the purchases and sales of shares said to be assessed under capital gain, even though they are held for less than 30 days. The above finding of the coordinate bench was further affirmed by the Hon ble high court vide its order dated 26/04/2016. Therefore, respectfully following the decision of the Hon ble high court we also hold in the case of the assessee that even though the shares are held for less than 30 days same are chargeable to tax as capital gain and not as income from business profession in case of the assessee. Disallowance u/s 14 A - Held that - Ld. assessing officer without recording the satisfaction that the claim of the assessee is incorrect has straightaway applied the provisions of rule 8D of the income tax rules, 1962. The above action of the Ld. assessing officer cannot be upheld in view of the decision of the Hon ble Delhi High Court in case of CIT versus Taikisah engineering private limited 2014 (12) TMI 482 - DELHI HIGH COURT that without recording the satisfaction against the claim of the assessee that it has incurred nil expenditure for earning of the exempt income the provisions of rule 8D cannot be invoked. In any case, the Ld. assessing officer has not pointed out any expenditure, which has been incurred by the assessee according to him for the earning of the exempt income of dividend of ₹ 8.60 Lacs. Further, the restriction of the disallowance to ₹ 40,000 by the Ld. 1st appellate authority does not have the support of the law. In view of this we direct the Ld. assessing officer to delete the disallowance under section 14 A of the income tax act of ₹ 40,000/- sustained by the Ld. 1st appellate authority. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of gain from sale of shares as business profit or short-term capital gain.
2. Disallowance under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Gain from Sale of Shares:

The primary issue was whether the gain of ?63,17,841 from the sale of shares should be classified as business profit or short-term capital gain. The assessee argued that the shares were purchased as investments and not for trading purposes, thus the gains should be treated as short-term capital gains. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the gains as business income due to the frequent transactions and the short holding period of some shares.

The Tribunal examined the nature of the transactions and the holding period. It was noted that there were 35 purchase transactions and 13 sales transactions during the year, with some shares held for less than 30 days. The Tribunal referenced a previous decision in the assessee's own case where it was held that gains from shares held for less than 30 days should be considered business income. However, this decision was overturned by higher authorities, including the High Court, which ruled that even shares held for less than 30 days should be taxed as capital gains.

Respecting the High Court's decision, the Tribunal concluded that the gains from the sale of shares, even if held for less than 30 days, should be treated as short-term capital gains and not business income. Thus, the assessee's appeal on this ground was allowed.

2. Disallowance under Section 14A:

The second issue was the disallowance of ?40,000 under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to earning exempt income. The assessee had earned ?8.60 lakhs in dividend income and claimed that no expenditure was incurred for earning this exempt income. The AO, however, applied Rule 8D and initially determined a disallowance of ?54,269, which was later restricted to ?83,609 based on the actual expenditure incurred by the assessee.

On appeal, the CIT(A) further restricted the disallowance to ?40,000 on an estimated basis. The Tribunal found that the AO did not record any satisfaction regarding the correctness of the assessee's claim that no expenditure was incurred for earning the exempt income, which is a prerequisite for invoking Rule 8D as per the Delhi High Court's decision in CIT vs. Taikisah Engineering Pvt. Ltd.

The Tribunal noted that the expenses listed by the assessee, such as audit fees and bank charges, were related to the business operations and not specifically for earning the exempt income. Consequently, the Tribunal directed the AO to delete the disallowance of ?40,000 under Section 14A, thereby allowing the assessee's appeal on this ground as well.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on both the primary issues. The gains from the sale of shares were classified as short-term capital gains, and the disallowance under Section 14A was deleted. The order was pronounced in the open court on 25/10/2016.