2019 (7) TMI 70 - AT - Income Tax

Correct head of income - characterization of receipts - Gains/losses arising on purchase and sale of shares - Capital gain or business income - not engaged in any business activities other than purchase and sale of shares/mutual fund units - fund utilized for acquisition of shares are both borrowed as well as accruals of the business - CIT (A) treating long-term/Short-term capital gain/loss as business income - HELD THAT - A similar pattern year after year may compel one to think the behaviour of an investor in a logical and rational manner, while the transactions might have been accepted as investment in the preceding year in a summary manner. There could be no res judicata in such cases in the light of continuity of the same behaviour in the subsequent assessment year. The continuity in the purchase and sale of shares being an important test to determine the character of transaction, the peculiar facts do not permit us to accept the plea of doctrine of consistency in the present case. CIT (A) in our view has seen facts of regularity in purchase and sale of shares for several years in a light-hearted manner and has ignored the clear commercial motive subsisting in the facts of the case. The assessee has paid substantial professional fees in its endeavour to corner gains from market fluctuations which fact also has not been envisioned in perspective while reversing the action of the AO. The CIT (A) while making reference to the circular of the CBDT has shunned the caution administered by the circular i.e. there cannot be any straightjacket formula and there should not be a sweeping conclusion but a case to case test or approach should be adopted. The issue is essentially factual and is governed by facts of each case. Judicial utterances made in the setting of the facts of a case would not thus apply unless it is shown that the facts are identical. We are thus not required to delineate the nicety of law de hors the facts in such a case. CIT (A) in our view has applied the legal principles in an abstract manner de hors the peculiar facts of the case and therefore, cannot be approved. We accordingly set aside the order of the CIT (A) and restore the action of the AO. - Decided in favour of revenue. Addition u/s 14A - HELD THAT - We find that the CIT (A) has sweepingly dismissed the case of the assessee without dealing with the point objectively. In the absence of any allocable expenses remotely connected to the investment activity, no disallowance is called for in excess of actual expenditure. We thus find merit in the plea of the assessee.

Summary

Issues Involved:
1. Classification of income from sale of shares as business income or capital gains.
2. Disallowance under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Classification of Income from Sale of Shares

The primary issue revolves around whether the income from the sale of shares should be classified as business income or capital gains. The assessee, an investment company registered as a Non-Banking Finance Company (NBFC), declared losses under the head 'Capital Gains' for the assessment years 2011-12 and 2012-13. The Assessing Officer (AO) disputed this classification, arguing that the frequent and substantial transactions in shares indicated a business activity, thus the income should be taxed under 'business income' as per Section 2(13) of the Income Tax Act, 1961.

The AO noted the following points to support his argument:
- The principal source of income for the assessee was from the purchase and sale of shares.
- The assessee had been involved in share trading for several years.
- The assessee was not engaged in any other business activities.
- The volume and frequency of transactions were high.
- The transactions were carried out through Portfolio Management Services (PMS).

The Commissioner of Income Tax (Appeals) [CIT (A)] reversed the AO's decision, stating that:
- The investments were shown in the books as investments, not as stock-in-trade.
- The assessee had not used borrowed funds for these investments.
- The transactions were managed by fund managers, indicating an investment activity rather than a business activity.

However, the Tribunal sided with the AO, emphasizing that:
- The frequent and substantial transactions indicated a systematic and regular activity akin to a business.
- The involvement of professional fund managers suggested an intent to maximize profits, characteristic of a business activity.
- The pattern of transactions over several years supported the classification as business income.

The Tribunal thus set aside the CIT (A)'s order and restored the AO's decision, classifying the income from the sale of shares as business income.

Issue 2: Disallowance under Section 14A

The second issue pertains to the disallowance under Section 14A of the Income Tax Act, which relates to expenses incurred in relation to income not includible in total income. The AO disallowed ?66,41,156 for AY 2012-13 and ?81,91,488 for AY 2011-12, applying Rule 8D of the Income Tax Rules.

The assessee argued that:
- The disallowance exceeded the actual expenses debited to the profit and loss account.
- The allocable expenses were ?36,93,385 for AY 2012-13 and ?52,17,679 for AY 2011-12.

The Tribunal found merit in the assessee's argument, noting that:
- The disallowance should not exceed the actual expenses incurred.
- The CIT (A) had dismissed the assessee's case without considering the allocable expenses objectively.

The Tribunal thus restricted the disallowance to the actual allocable expenses, reducing the disallowance to ?36,93,385 for AY 2012-13 and ?52,17,679 for AY 2011-12.

Conclusion:

The Tribunal concluded that the income from the sale of shares should be classified as business income due to the systematic and regular nature of the transactions. Additionally, the disallowance under Section 14A was restricted to the actual expenses incurred, providing relief to the assessee. The appeals of both the Revenue and the assessee were allowed, resulting in the classification of income as business income and a reduction in the disallowance under Section 14A.