2017 (5) TMI 728 - AT - Income Tax

Disallowance in regard to expenses relatable to exempted income by invoking the provisions of section 14A of the Act read with rule 8D - Held that - We find that in case the assessee is able to explain that no expenditure has been incurred for earning this income, AO will look into the facts and decide the case accordingly. Orders of the lower authorities are set aside and the matter remanded back to the file of the AO for fresh adjudication. The appeal of assessee is allowed for statistical purpose.

Summary

Issues:
1. Disallowance of expenses relatable to exempted income under section 14A of the Income Tax Act.
2. Treatment of business income as capital gains.

Issue 1: Disallowance of expenses relatable to exempted income under section 14A of the Income Tax Act:
The appeal involved the disallowance made by the Assessing Officer (AO) in regard to expenses related to exempted income by invoking section 14A of the Act read with rule 8D of the IT Rules 1962. The Assessments were framed by ACIT, Circle 4(2), Mumbai for the A.Ys. 2008-09 and 2009-10. The AO disallowed expenses relatable to exempted income by invoking Rule 8D(2)(iii) and disallowed a specific sum. The CIT(A) confirmed the AO's action, stating that expenses debited to the Profit & Loss Account included expenditure incurred for transactions of shares that yielded exempt income. The appellant contended that no expenditure was incurred for earning exempt income as only dividend was credited directly to the bank account. The Tribunal remanded the matter back to the AO for fresh adjudication, allowing the appeal of the assessee for statistical purposes.

Issue 2: Treatment of business income as capital gains:
The Revenue's appeal concerned the treatment of business income as capital gains. The Revenue raised two grounds against the order of the CIT(A), arguing that the conversion of stock into investment was not allowed by the AO during a specific year and that the assessee had converted its stock in trade into investment and paid tax on the conversion. The Tribunal noted previous orders relating to similar issues in earlier assessment years and directed the AO not to treat short-term capital gains as business income. The Tribunal consistently followed previous decisions and restored the matter back to the AO for further examination in line with previous tribunal decisions. The appeal of the Revenue was allowed for statistical purposes.

In conclusion, the judgment addressed the issues of disallowance of expenses related to exempted income under section 14A of the Income Tax Act and the treatment of business income as capital gains. The Tribunal remanded the first issue back to the AO for fresh adjudication and directed the AO not to treat short-term capital gains as business income in line with previous decisions. The appeals of both the Revenue and the assessee were allowed for statistical purposes.