2017 (9) TMI 1152 - AT - Income Tax

Income from transaction of shares - capital gain or business income - AO has held that the shares were stock in trade - Held that - The assessee is a company which is engaged in the principal business of consulting. The major income of the assessee is shown of consultancy income is shown as the business income. The assessee is holding these shares which are sold during the year in the books of accounts as investments and not a stock in trade. Assessee has also not borrowed any funds for the purpose of making any investments. In the earlier 2 years assessment on identical facts and circumstances the income from purchase and sale of the shares were also held by the Ld. assessing officer as capital gains. All the shares sold by the assessee are based on actual deliveries. All the shares shown by the assessee are held in its demat account and dividend income earned by the assessee as dividend of 1 661 8416/ in this year and in previous year of 1 028 9473/ is also shown as exempt income during the year. All of the shares are valued at cost Only as an investment. The memorandum and articles of Association of the company also authorizes it to invested surplus funds in shares or in any other form of investments Assessee is an investor and not a Trader in shares. Therefore looking to the facts of the case we confirm the finding of the Ld. CIT (A) in holding that the income of short-term capital gain shown by the assessee on sale of shares is likely to be charged under the head capital gains and not under the head business income. With respect to the addition made on account of business income instead of short-term capital gain on sale of the shares is dismissed. - Decided against revenue Disallowance u/s 14A - AO s non satisfaction about the correctness of the claim - Held that - In the present case unless the ld Assessing Officer records his satisfaction about the correctness of the claim of the assessee cannot move ahead for application of Rule 8D of the Act. The Hon ble Delhi High Court in case of CIT Vs. Taikisha Engineering India ltd (2014 (12) TMI 482 - DELHI HIGH COURT) has held that it is only when voluntary disallowance made by the assessee u/s 14A of the Act is found to be unsatisfactory on examination of accounts that Assessing Officer is entitled and authorized to compute deduction under Rule 8D of the IT Rules. As in the present case no such satisfaction is recorded respectfully following the decisioin of Hon ble Delhi High Court we confirm the finding of the ld CIT(A) to delete the disallowance u/s 14A of the Act. - Decided against revenue

Summary

Issues Involved:

1. Whether the income from the sale of shares should be treated as business income or capital gains.
2. The disallowance made under Section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of Income from Sale of Shares:

The primary issue before the tribunal was to determine whether the income from the sale of shares should be treated as business income or capital gains. The assessee had shown capital gains from mutual funds and shares, but the Assessing Officer (AO) reclassified this as business income due to the frequent transactions and high volume of shares traded. The CIT (A) reversed this, treating the income as capital gains, which was upheld by the tribunal.

The tribunal noted that the assessee had consistently treated the shares as investments in its books of accounts and valued them at cost. Furthermore, the assessee had not borrowed funds for these investments, indicating an intention to invest rather than trade. The tribunal also considered past assessments where similar income was treated as capital gains, and the AO had accepted this treatment.

The Delhi High Court had remitted the issue back to the tribunal, emphasizing the need to examine the factual aspects and allowing both parties to present relevant judgments. The tribunal, upon re-examination, reaffirmed that the assessee was an investor and not a trader in shares, thus confirming the treatment of the income as capital gains.

2. Disallowance under Section 14A:

The second issue involved the disallowance made by the AO under Section 14A of the Income Tax Act, which pertains to the expenditure incurred in relation to income not includible in total income. The AO had disallowed ?20,29,957, applying Rule 8D of the Income Tax Rules, without recording satisfaction about the correctness of the assessee's claim.

The CIT (A) deleted the disallowance, and the tribunal upheld this decision. The tribunal emphasized that the AO must record satisfaction about the correctness of the assessee's claim before applying Rule 8D, as mandated by the Delhi High Court in CIT Vs. Taikisha Engineering India Ltd. Since the AO failed to do so, the tribunal confirmed the deletion of the disallowance.

Conclusion:

The tribunal concluded that the income from the sale of shares should be treated as capital gains and not business income. Additionally, the disallowance under Section 14A was deleted due to the AO's failure to record the necessary satisfaction. Consequently, the appeals by the revenue were dismissed.