2019 (2) TMI 616 - AT - Income Tax

Gain earned as acquired from IPO (Public issue) - Gains to be assessed as Capital Gains or as a Business Income - Held that - The perusal of holding period chart extracted by Ld. AO clearly reveal that the assessee has dealt in 11 scrips / transactions during the year out of which the holding period of 10 scrips / transactions is five or less than five days which indicate that the investments were made by the assessee as a trader only and not as an investor and the primary objective of the investments was to earn the gains in a business-like manner rather than to earn accretion to the same by way of dividend. The intention of the assessee gets manifested from the fact that the scrips have been sold within a very short span of time so as to reap the benefits of listing gains only. This is further fortified by the fact that the assessee was engaged as share broker and as evident from memorandum of association as placed on record, dealing in shares was one of the main objectives of the assessee company. Hence, after due consideration, we find ourselves in agreement with the view taken by first appellate authority and we see no reason to interfere with the same. All the grounds as well as the appeal stand dismissed. Addition u/s 14A r.w.r 8D - Held that - It is undisputed position that the Tribunal in assessee s own case for AY 2009-10 as well as first appellate authority in AY 2011-12 has restricted the same to 5% of exempt income, which has been accepted by the assessee. Relying upon the same, first appellate authority has restricted the expense disallowance to 5% of exempt income, which is fair under the circumstances and no further relief could be granted to the assessee on this account. The same is in line with estimation made in earlier years and therefore, the grounds of appeal, to that extent, stands dismissed. So far as interest disallowance u/r 8D(2)(ii) is concerned, we find that the assessee has not offered any disallowance against the same and therefore, to contend that the Ld. AO failed to reject the workings made by assessee and record a proper satisfaction in that respect could not help the assessee in any manner. The same is devoid of any merits. We find substantial force in the argument of AR that the assessee had sufficient interest free funds in the shape of Share Capital & Free Reserves to make new investments including stock in trade. The perusal of financial statements as placed on record reveals that there is no change in non-current investments made by the assessee during impugned AY whereas current investments and inventories have been funded by way of reduction in overall current assets. Therefore, a presumption was to be drawn in assessee s favor that own funds were used to make the investments. Therefore, upon due consideration, we are inclined to delete the impugned interest disallowance u/r 8D(2)(ii). - Decided in favour of assessee.

Summary

Issues:
1. Assessment of Short Term Capital Gain as business income for AY 2011-12.
2. Disallowance under Rule 8D for AY 2012-13.

Analysis:

Issue 1: Assessment of Short Term Capital Gain as business income for AY 2011-12

The Appellate Tribunal ITAT Mumbai dealt with the issue of whether Short Term Capital Gain earned by the assessee should be treated as business income or capital gains. The assessee contended that the shares were acquired from IPOs and held as investments, thus qualifying for capital gains treatment. However, the Assessing Officer (AO) noted the short holding periods of the transactions and concluded that the gains should be treated as business income. The Tribunal upheld the AO's decision, considering the frequency of transactions and short holding periods as indicative of trading activity rather than investment. The Tribunal found that the primary objective was to earn listing gains, supported by the nature of the assessee's business as a share broker. Therefore, the Tribunal dismissed the appeal, affirming the treatment of gains as business income.

Issue 2: Disallowance under Rule 8D for AY 2012-13

For the assessment year 2012-13, the dispute revolved around disallowances made under Rule 8D. The AO disallowed expenses under Rule 8D related to exempt dividend income earned by the assessee. The first appellate authority restricted the expense disallowance to 5% of the exempt income, following previous decisions. The Tribunal upheld this decision, finding it fair and consistent with earlier estimations. However, regarding interest disallowance under Rule 8D(2)(ii), the Tribunal noted that the assessee had sufficient interest-free funds for investments, leading to the deletion of the interest disallowance. Additionally, concerning amounts written off against refund receivable from SEBI, the Tribunal directed the matter back to the AO for re-examination based on the evidence provided by the assessee. Consequently, the appeal for the assessment year 2012-13 was partly allowed.

In conclusion, the Appellate Tribunal ITAT Mumbai dismissed the appeal for AY 2011-12 but partly allowed the appeal for AY 2012-13, addressing the issues of Short Term Capital Gain treatment and disallowances under Rule 8D. The judgments were delivered on 5th December 2018.