2011 (1) TMI 28 - AT - Income Tax

Business income versus capital gains - Dis allowance u/s 14A - assessee is a company engaged in activities of NBFC and doing financing money lending investment and sometimes trading activities - whether such voluminous and frequent purchase and sale of shares should be treated as investment activity or business activity in spite of treating by the assesee such transactions as investment activity and booking the result under the head investment activity - A.O. has treated entire amount of capital gains as business income. A.O. has disallowed entire amount of STT by treating all shares and units as capital asset He has not allowed rebate u/s. 88E in respect of STT paid though he treated Capital gains as business income. - Held that - the assessee has proved its bonafide as an investor of shares and taking the totality of facts into consideration - income arising from purchase and sale of shares to be income arising from investment chargeable to tax as income from capital gains. Assessee earned dividend income of Rs. l, 43, 525/- - Tribunal took the consistent view of disallowing 1% of the dividend income as expenses incurred for earning such dividend. Therefore the disallowance comes to Rs. 1435/-. This ground of the assessee is therefore partly allowed.

Summary

Issues Involved:
1. Classification of income from share transactions as either "Income from Capital Gain" or "Business Income."
2. Disallowance under Section 14A of the Income Tax Act for expenses related to exempt income.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue was whether the income from the sale of shares amounting to Rs. 12,86,081/- should be treated as "Income from Capital Gain" or "Business Income." The Assessing Officer (A.O.) treated this income as business profit, citing the frequent and voluminous transactions in shares, which indicated trading activity. The A.O. referenced the Supreme Court case of Raja Bahadur Visheshwara Singh vs. CIT and guidelines from the Authority for Advance Rulings and CBDT Circular No. 4/2007 to support this classification.

The CIT (A) overturned this decision, directing that the income be treated as arising from investment activities, thus chargeable to tax as capital gains. The CIT (A) emphasized the presentation in the books of accounts, which showed separate treatment for investment and trading activities. The CIT (A) also considered the intention of the assessee, the nature of transactions, and the treatment of shares as investments in the balance sheet.

The Tribunal upheld the CIT (A)'s decision, noting the absence of contrary material from the revenue. It was noted that the assessee maintained separate accounts for investment and trading, and the transactions in question were treated as investments in the books. The Tribunal referenced several judicial decisions, including the case of Sarnath Infrastructure (P) Ltd. vs. Asstt. CIT and the Bombay High Court judgment in Commissioner of Income Tax vs. Gopal Purohit, which supported the treatment of delivery-based transactions as investment activities.

2. Disallowance under Section 14A:
The second issue involved the disallowance of Rs. 42,237/- under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to exempt income. The assessee earned dividend income of Rs. 1,43,525/- and claimed it as exempt. The A.O. disallowed a proportionate amount of expenses, arguing that common funds and management were used for both taxable and exempt income, and no separate books of accounts were maintained.

The CIT (A) confirmed this disallowance. However, the Tribunal partially allowed the assessee's cross-objection, reducing the disallowance to 1% of the dividend income, amounting to Rs. 1,435/-, based on consistent views taken in similar cases.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s order to treat the income from share transactions as capital gains. The Tribunal partially allowed the assessee's cross-objection by reducing the disallowance under Section 14A to 1% of the dividend income. The final order was pronounced in the open court.