2024 (11) TMI 363 - AT - Income Tax

Expenses claimed against the Capital gains - AO disallowed administration expenses claimed by the assessee as not genuine and excessive - HELD THAT - After careful consideration of the facts on record we observed that the assessee is dealing in the business of shares and securities the monitoring of such securities the assessee has to incur certain expenses on PMS. Therefore this expenditure is directly relating to the securities transaction. The nature of transaction demands such expenditures therefore on the similar facts on record the ITAT Pune has considered the same and allowed such expenses. After careful consideration of findings of CIT(A) he has decided the issue in favour of the assessee and he has also considered the conflicting decisions and came to conclusion based on decision of Vegetable Product 1973 (1) TMI 1 - SUPREME COURT The decision of Ld CIT(A) is reasonable findings on the issue of allowability of PMS expenses. Therefore we are not inclined to disturb the same. Disallowance of General administrative expenses - assessee has incurred these expenditure on salaries administration depreciation etc - HELD THAT - The income tax provisions allows the assessee s to compute the income under different heads of income and the assessee is allowed to claim the expenses based on the relevant heads of income. In the given case the assessee can claim the general expenses of running the business only under the head business income. Even there is no income declared under the head business income the assessee is allowed to claim these expenses as business expenditure if there is no business income the assessee is allowed to carry forward the same in case the assessee does not have income under other heads of income other than loss under the head Capital Gains. Since the assessee has declared profit under the head Capital Gains the assessee is allowed to adjust the same u/s 71 - Hence the above said expenses cannot be claimed under the head Capital Gains u/s 48 of the Act. Therefore we are inclined to decide the issue of claim of administration expenses in favour of the revenue. Ultimately the assessee may get the benefit of claim of these expenses as business expenditure under the head business income. As such there is no impact for the same in this AY Treating transaction entry with the assessee as business transaction - We observed that the assessee has classified the investments made in the various shares including HCL shares for the purpose of investment only. The various circulars issued by the CBDT allows the assessee to choose the method of accounting relating to dealing in securities transactions either on the line of treating the same under the head business income or Capital Gain depending upon the treatment of various shares for the purpose of pure investment or not. Whatever the method adopted by the assessee the same has to be followed consistently. The ld CIT(A) has considered the various circulars particularly Circular no 6/2016 dated 29.02.2016 which has settled the issues under consideration. Therefore we do not see any reason to disturb the findings of ld CIT(A). Therefore we are inclined to dismiss the ground no.2 raised by the revenue. Bogus Loss on purchase and sale of shares - introduction of unaccounted money (difference between the purchase and sale price) without suffering any tax - assessee submitted that assessee has sold these shares on distress - HELD THAT - Assessee has entered into agreement with the management of PDK to investment in their company. He presumed or expected to invest to the extent of 51% of total shareholding. He invested in their shares @ Rs. 100 per share including share premium. However as per the submissions made before us it was claimed that the management of PDK has refused to allow him to invest to the extent of 51%. Due to the above disagreement the assessee has to disinvest the same at much lower price of Rs. 40/- per share to one of the existing Director of the same PDK group. In support of the above submissions the assessee has filed certain communications from 07.04.2023 to 07.07.2023. We are not able to understand why the dispute has to be settled with in such short period of time and also to reduce the sale price from Rs. 100 to Rs. 40 per share. There is not substance to show why he has agreed to invest Rs. 100/- per share in first place and also to reduce the share price to sell the same shares to one of the directors of PDK and sell the shares at such huge loss. The whole transaction entered by the assessee does not display any prudence and the explanations offered to exit the project does not impress us. Decided against assessee.

Summary

Issues Involved:

1. Disallowance of expenses claimed by the assessee against capital gains.
2. Classification of income from sale of shares as capital gains or business income.
3. Disallowance of capital loss on the sale of shares of PDK Shenaz Hotels Pvt. Ltd.

Issue-Wise Detailed Analysis:

1. Disallowance of Expenses Claimed by the Assessee Against Capital Gains:

The primary contention was whether the expenses claimed by the assessee, including Portfolio Management Services (PMS) fees, salaries, and administrative costs, could be deducted from capital gains. The Assessing Officer (AO) disallowed these expenses, arguing that they were not permissible under Section 48 of the Income Tax Act, which only allows deductions for expenses incurred wholly and exclusively in connection with the transfer of capital assets. The CIT(A) partly allowed the expenses, relying on judicial precedents that favored the assessee, such as the ITAT Pune decision in Serum Institute of India Ltd., which allowed PMS fees as a deduction from capital gains. The Tribunal upheld the CIT(A)'s decision, acknowledging that the assessee's expenditure on PMS was directly related to securities transactions and thus allowable. However, general administrative expenses were not allowed under capital gains but could be claimed under business income, aligning with section 71 of the Act.

2. Classification of Income from Sale of Shares as Capital Gains or Business Income:

The AO treated the income from the sale of shares as business income, citing factors such as the substantial scale of transactions and the systematic manner of trading. The assessee argued that the shares were held as investments, not stock-in-trade, and relied on CBDT Circulars No. 04/2007 and 06/2016, which clarified the treatment of shares as capital assets if held for a certain period and consistently treated as investments. The CIT(A) accepted the assessee's position, emphasizing that the shares were recorded as investments in the balance sheet and that the intention was to earn dividends, not trading profits. The Tribunal upheld this view, noting that the assessee consistently treated the shares as investments and followed the CBDT guidelines, thus classifying the income as capital gains.

3. Disallowance of Capital Loss on the Sale of Shares of PDK Shenaz Hotels Pvt. Ltd.:

The AO disallowed the claimed loss on the sale of shares, suspecting it to be a bogus transaction intended to reduce tax liability. The assessee contended that the shares were sold at a loss due to a strategic decision to exit the investment after failing to acquire a controlling stake. The CIT(A) found that the assessee had adequately justified the transaction, providing documentation of purchase and sale, and noted that the AO had not brought any contrary evidence. However, the Tribunal disagreed, finding the transaction lacked commercial prudence and the explanations unconvincing, thus siding with the revenue's view that the loss was not genuine.

Conclusion:

The Tribunal's decision was a mixed outcome for both parties. It upheld the CIT(A)'s decision to allow certain expenses against capital gains and classify the income from shares as capital gains. However, it reversed the CIT(A) on the issue of capital loss from the sale of PDK Shenaz Hotels Pvt. Ltd. shares, siding with the revenue's assessment of the transaction as lacking authenticity. The appeal by the revenue was thus partly allowed.