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2017 (4) TMI 403 - AT - Income TaxIncome from sale of shares - capital gains OR business income - Held that - We found that shares costing for ₹ 3. 59 croress were realized for ₹ 14. 50 crores. The shares were sold during the period from April2007 to January, 2008 and fresh shares has been acquired during the period June, 2007 to March, 2008. In case of unquoted shares, the assessee has acquired the same during the period June, 2007 to March, 2008, which was acquired out of share application given in earlier years, which clearly indicates that assessee has not used borrowed funds for investment held either as on 31-3-2008 or 31-3-2007. The AO has failed to appreciate the factual position emerging out of the audited balance sheet to the effect that increased unsecured loans has been utilized for further advancing loans. Loans and Advances as on 31-3-2008 amounted to ₹ 20. 56 croress as against loans and loan of ₹ 8. 96 croress as on 31-3-2007. Thus, increase in loans and advances were much more than increase in unsecured loans. Accordingly, we do not find any infirmity in the order of CIT(A) for holding these shares as investment giving rise to the capital gain. The CIT(A) has properly appreciated the volume and frequency of the transaction, the assessee s intention of investing in shares as well as department‟s conclusion of treating these shares as investment in the scrutiny assessment framed in earlier years. - Decided in favour of assessee. Disallowance u/s 14A - Held that - No disallowance should be made under the head interest expenditure. Disallowance under Rule 8D (2) (iii) should be restricted to the expenses claimed in the P&L account, as disallowed in earlier year. See HDFC Bank Ltd (2016 (3) TMI 755 - BOMBAY HIGH COURT). Effective ground of appeal is allowed in favour of the assessee, in part.
Issues Involved:
1. Classification of income from the sale of shares as capital gains vs. business income. 2. Disallowance under Section 14A of the Income Tax Act. Detailed Analysis: 1. Classification of Income from Sale of Shares: The primary issue in the appeal filed by the Assessing Officer (AO) was whether the income from the sale of shares should be assessed as capital gains or business income. The AO argued that the frequency and volume of transactions indicated that the assessee was engaged in a business activity rather than mere investment. The AO noted that the assessee had declared income under various heads, including speculative profit, short-term capital gains (STCG), and long-term capital gains (LTCG), and had claimed exemptions under sections 10(36) and 10(38) of the Income Tax Act. The AO concluded that the assessee's activities were organized and covered by the definition of business under section 2(13) of the Act. The assessee appealed to the First Appellate Authority (FAA), arguing that similar issues had been decided in his favor in previous assessment years (AYs), and the AO had previously taxed profits from share transactions under the head capital gains. The FAA agreed with the assessee, noting that the assessee had consistently shown investments in shares as capital assets in his books and had not converted them into stock-in-trade. The FAA held that the income from the sale of shares should be assessed as capital gains. Upon further appeal, the Tribunal upheld the FAA's decision. The Tribunal emphasized the importance of the assessee's intention while purchasing shares and the treatment given in the books of account. It noted that the assessee had treated the shares as investments and valued them at cost, indicating an intention to hold them as capital assets. The Tribunal also highlighted the principle of consistency, stating that the AO cannot change the nature of the income without bringing contrary material on record. The Tribunal concluded that the income from the sale of shares should be treated as capital gains and not business income. 2. Disallowance under Section 14A:The second issue in the appeal filed by the assessee was the disallowance made under Section 14A of the Income Tax Act. The AO had disallowed ?13.21 lakhs and ?8.52 lakhs under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Rules, respectively, on the grounds that the assessee had paid interest on loans and invested in shares generating exempt income. The FAA upheld the AO's disallowance, stating that the assessee had not substantiated that no borrowed funds were used for investment in shares. The FAA referred to previous orders and observed that the assessee had not demonstrated that funds from the same bank accounts used for business purposes did not include borrowed funds for investment activities. During the hearing before the Tribunal, the assessee argued that the Tribunal had deleted similar disallowances in earlier years, holding that investments were made from the assessee's own funds and not borrowed funds. The Tribunal found merit in the assessee's argument, noting that the assessee had not used interest-bearing funds for acquiring shares and securities. The Tribunal directed that no disallowance should be made under the head interest expenditure and restricted the disallowance under Rule 8D(2)(iii) to the expenses claimed in the profit and loss account, as done in the earlier year. In conclusion, the Tribunal dismissed the appeal filed by the AO and partly allowed the appeal filed by the assessee, holding that the income from the sale of shares should be treated as capital gains and restricting the disallowance under Section 14A to the expenses claimed in the profit and loss account. Order Pronounced:As a result, the appeal filed by the AO is dismissed, and the appeal of the assessee is allowed partly. The order was pronounced in the open court on 05th April 2017.
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