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2017 (1) TMI 1339 - AT - Income TaxGain arising on sale of shares - business income OR capital gains - Held that - In view of judgments of Hon ble Supreme Court in the case of Radha Swami Sat Sang, vs. CIT (1991 (11) TMI 2 - SUPREME Court) and CIT v. Excel Industries Ltd. (2013 (10) TMI 324 - SUPREME COURT ), upholding principal of consistency and in view of the circular of the CBDT and in view of facts of this case as discussed above, claim of the assessee deserves to be upheld. Therefore, after taking into all the facts and circumstances of the case and in view of the detailed discussion made by us in earlier part of our order, we find that the detailed findings recorded by Ld. CIT(A) for upholding the claim of the assessee by treating the income arising from purchase and sale of shares as assessable under the head of capital gains are well reasoned and do not require any interference from our side Disallowance made by the AO u/s 14A read with Rule 8D - Held that - The assessee has maintained separate accounts with regard to its business income and expenses incurred in earning the business income. It is further brought to our notice that the expenses incurred with regard to the activity of making investment in shares have been debited to the capital account and have not been debited to P & L account. The P & L A/c prepared by the assessee is exclusively for the purpose of reflecting its transactions arising out of business activities i.e. comprising of business income and business expenses. Under these circumstances, there was heavy onus upon the shoulders of the AO to establish if any of the expenses debited in the P& L account did not pertain to its business activity but with any other activity say for earning income from capital gains. Unfortunately, no such exercise has been done by the AO before invoking the provisions of section 14A. It was all the more necessary in the light of the fact that expenses incurred on PMS brokerage fee and other incidental expenses for making investment into shares have not been debited in the P & L account by the assessee. These facts have also not been disputed by the Ld. DR before us. Thus the reasoning given by the Ld. CIT(A) for deleting the disallowance made by the AO is in accordance with law and facts of this case. - Decided in favour of assessee
Issues Involved:
1. Classification of income from sale of shares and mutual funds as 'business income' or 'capital gains'. 2. Disallowance under Section 14A read with Rule 8D for expenses related to exempt income. Detailed Analysis: Issue 1: Classification of Income from Sale of Shares and Mutual Funds Background and Facts: The Revenue appealed against the CIT(A)'s order, which reversed the AO's classification of income from the sale of shares as 'business income' instead of 'capital gains'. The AO noted that the assessee engaged Portfolio Managers (PMS) and paid significant PMS charges, suggesting a business activity rather than mere investment. Assessee's Argument: The assessee argued that the primary activity was income from sports endorsements, and investments in shares were for long-term wealth appreciation, not trading. The assessee had consistently shown such income as 'capital gains' in previous years, which was accepted by the AO. The assessee cited various tribunal decisions supporting that using PMS does not convert investments into business activities. AO's Rejection: The AO dismissed the assessee's arguments, referring to CBDT Circular No.4/2007 and the decision in M/s Radials International vs. ACIT, concluding that the systematic and regular transactions indicated a business activity. CIT(A)'s Findings: The CIT(A) analyzed the facts and determined that the assessee's transactions were investments, not business activities. The CIT(A) noted the following: - Major income was from sports endorsements. - Investments were made from own funds, not borrowings. - Dividend income was significantly higher than capital gains. - Shares were held as investments, not stock-in-trade. - The holding period of shares indicated investment intent. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, emphasizing the following: - The assessee's consistent treatment of shares as investments in past assessments. - CBDT Circulars No.4/2007 and No.6/2016 allow for dual portfolios (investment and business). - The AO's reliance on Radials International was misplaced as the decision was reversed by the Delhi High Court. - The assessee's choice to treat shares as investments was bona fide and consistent. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming that the income from the sale of shares should be classified as 'capital gains'. Issue 2: Disallowance under Section 14A Read with Rule 8D Background and Facts: The AO disallowed ?76,55,841 under Section 14A read with Rule 8D, stating that the assessee incurred expenses to earn exempt income (dividends). Assessee's Argument: The assessee contended that no expenses related to exempt income were claimed in the P&L account. Expenses for PMS were debited to the capital account, and only a proportionate amount was claimed against taxable capital gains. CIT(A)'s Findings: The CIT(A) found that: - The assessee did not claim the PMS expenses in the P&L account. - The AO failed to record dissatisfaction with the assessee's accounts as required by Section 14A(2). - The total direct expenses related to exempt income were already disallowed by the assessee. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, noting: - The AO did not establish that any expenses in the P&L account pertained to earning exempt income. - The assessee maintained separate accounts for business and investment activities. - The AO's disallowance was not justified as the assessee did not claim the relevant expenses. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the deletion of the disallowance under Section 14A. Final Judgment: For both assessment years (2010-11 and 2011-12), the Tribunal upheld the CIT(A)'s orders, classifying the income from the sale of shares as 'capital gains' and deleting the disallowance under Section 14A. The appeals filed by the Revenue were dismissed.
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