2017 (2) TMI 593 - AT - Income Tax

Disallowance under section 14A - disallowance has been worked out with reference to Rule 8D(2)(iii) being administrative and general expenses estimated at 0.5% of the average value of investment - Held that - As per financial data before us, the substantive part of expenditure incurred obviously has proximate connection with the earning of dividend income. The expenditure incurred is towards all business activities including investment activities and remains undivisible. Hence, we are unable to guage the rationale for not applying Rule 8D for apportionment of expenditure in relation to dividend income. The proposition towards reasonable estimated expenditure with reference to dividend income as propounded on behalf of assessee cannot be ordinarily accepted in derogation of the statutory frame work provided by the statue. No tangible cause has been shown by the assessee for doing so. Thus, in the given set of facts, in our considered opinion, the formula provided under Rule 8D would come into play. Indication of prima facie presence of satisfaction can be deemed to be substantial compliance of the provisions without there being any explicit assertion about the same. As noted, the affirmative steps by way of SCN on the issue in the first instance tantamount to subsistence of satisfaction in the instant case. Hence, in our view, S. 14A as presently codified does not provide impetus on explicit recording of satisfaction per se. The requirement of section would stand addressed when the satisfaction is otherwise discernible in the action of the AO. Applying the aforesaid view in the context, we are of the opinion that requisite satisfaction was subsisting for invoking section 14A and Rule 8D. Consequently, we hold that the objection of the assessee on this score is not sound. - Decided against assessee. Sale of shares and securities which are held for less than 30 days - Short Term Capital Gain(STCGs) OR business income - Held that - The issue is thus required to be decided as per the facts and the circumstances of the individual case and not having regard to the smaller period of holding alone. As pointed out by the assessee before the CIT(A), the assessee has sold the shares held for less than thirty days in only six instances which in our view does not give any indication of systematic and organized business activity. The loss declared on similar transactions as capital loss which is detrimental to assessee was duly accepted by the revenue in the past. No aspersions have cast on LTCG either. Therefore, in the totality of the facts, it is difficult to agree with the view rendered by the CIT(A). While one set of transaction have been treated as capital assets, there is no reason to treat other set of transactions similar nature as trading assets merely owing to lesser period of holding. In the circumstances, the plea of the assessee deserves acceptance. The action of revenue is accordingly liable to be struck down.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Treatment of income from short-term capital gains as business income.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

The assessee's appeal concerns the disallowance of ?12,19,173 under Section 14A of the Income Tax Act, 1961, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The disallowance was calculated with reference to Rule 8D(2)(iii), attributing administrative and general expenses at 0.5% of the average value of investments.

The assessee, engaged in the business of sales and purchase of shares, earned major income from tax-free dividend income and interest income. The Assessing Officer (AO) observed that disallowance of indivisible expenditure attributable to dividend income was necessary under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The AO calculated a total disallowance of ?19,44,064, including ?12,19,173 towards common administrative expenses as per Rule 8D(2)(iii). The CIT(A) confirmed the disallowance of ?12,19,173 while granting relief on other limbs.

The assessee argued that the disallowance was excessive and that many expenses, such as professional charges and rent, were not incurred for earning dividend income. Additionally, the assessee contended that the AO did not record the requisite "satisfaction" in writing, thus failing to meet the statutory requirement. The Department, however, argued that the AO's satisfaction was implicit and that the disallowance was justified.

The Tribunal noted that Rule 8D prescribes a statutory formula for disallowance under Section 14A, applicable from AY 2008-09. It observed that the major portion of the assessee's funds was applied towards investments yielding exempt income, and the expenditure incurred was indivisible. The Tribunal held that the formula under Rule 8D was appropriately applied and that the AO's satisfaction was implicit in the show-cause notice issued. Consequently, the Tribunal upheld the disallowance and dismissed the assessee's grounds on this issue.

2. Treatment of Income from Short-Term Capital Gains as Business Income:

The second issue pertains to the treatment of short-term capital gains (STCG) as business income for shares held for less than 30 days. The AO assessed the STCG of ?55,79,921 as business income, citing the high volume, frequency, and magnitude of transactions indicative of a profit motive.

The CIT(A) granted partial relief but upheld the AO's decision for shares held for less than 30 days. The assessee argued that only six instances involved gains from shares held for less than 30 days and that the scheme of the Act does not allow bifurcation based on holding period. The assessee also pointed out that long-term capital gains (LTCG) were not questioned, and similar losses were accepted in earlier years.

The Tribunal observed that the treatment of shares as capital or trading assets is a question of fact and should not be based solely on the holding period. It noted that the revenue accepted similar losses in earlier years and did not question LTCG. The Tribunal found no reason to treat transactions differently based on holding period and held that the revenue's action was unjustified. Consequently, the Tribunal allowed the assessee's appeal on this issue and modified the order of the CIT(A).

Conclusion:

The Tribunal partly allowed the appeal, upholding the disallowance under Section 14A but reversing the treatment of short-term capital gains as business income for shares held for less than 30 days. The judgment was pronounced in open court on 06/02/2017.