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2017 (3) TMI 1331 - AT - Income TaxSale of shares - capital gain or business income - Held that - When the share sold in the current year was carried forward and the substantial gain was earned by the assessee only from sale of two scripts. And for earlier years the Revenue has accepted the STCG on similar transaction, in our considered opinion, the income earned by assessee can only be taxed as Capital Gain . Hence, the ground no.1 raised by assessee is allowed. Disallowance u/s 14A - Held that - CIT(A) concluded that assessee could not establish the nexus between the capital invested in securities and the borrowed loan. All the funds were hotchpotch and confirmed the disallowance. Considering the peculiarity of the fact that the assessee earned only a sum of ₹ 1,10,518/- as exempt income. The assessee has sufficient funds and earned interest income of ₹ 3,55,692/-. Thus, we respectfully following the decision of coordinate bench in Vahanvati Consultants P. Ltd. vs. DCIT (2016 (8) TMI 365 - ITAT MUMBAI), restrict the disallowance u/s 14A to ₹ 1,10,518/-.
Issues:
1. Treatment of Short Term Capital Gains as business income 2. Disallowance made under Section 14A of the Income Tax Act 1961 3. Adjudication of rebate under Section 88E if Short Term Capital Gains are held as business income Issue 1: Treatment of Short Term Capital Gains as business income The appeal was against the order of the ld. CIT(A) confirming the AO's treatment of Short Term Capital Gains (STCG) as business income. The assessee argued that the gains made on investments were consistently treated as STCG in earlier years. The AO concluded that the assessee was engaged in trading of shares based on factors like period of holding and turnover. The Co-ordinate Bench's decision in a similar case was cited in support of treating the income as Capital Gains. The Tribunal agreed with the assessee, considering that substantial gains were earned from only two securities and previous years' treatment of similar transactions as STCG. Therefore, the income was held to be Capital Gains. Issue 2: Disallowance under Section 14A of the Income Tax Act 1961 The AO disallowed a sum under Section 14A as the assessee earned exempt income without incurring any expenses. The assessee contended that no disallowance was required as there were sufficient interest-free funds available. The AO applied Rule 8D for disallowance. The Tribunal, following precedent, restricted the disallowance to the amount of exempt income earned, as the assessee had enough funds and earned interest income. Thus, the disallowance under Section 14A was limited to the exempt income amount. Issue 3: Adjudication of rebate under Section 88E The issue of seeking a rebate under Section 88E in case STCG was considered as business income was not adjudicated upon by the ld. CIT(A). However, since the Tribunal held the STCG to be Capital Gains, this issue did not require further consideration. In conclusion, the Tribunal partly allowed the appeal of the assessee by holding the Short Term Capital Gains as Capital Gains and restricting the disallowance under Section 14A to the amount of exempt income earned. The issue regarding rebate under Section 88E was not addressed due to the classification of STCG as Capital Gains.
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