2011 (1) TMI 1056 - AT - Income Tax

Business income Vs. Capital gain - assessee is a broker as well as investor - Held that - the assessee is a broker as well as investor. It has maintained the investment portfolio separately, income for which was liable to be taxed as capital gains, as the intention in respect of this was to hold the investment as investment only and was shown as such in the books of account and income therefor was shown and treated as capital gains in the successive assessments.It is thus clear that assessee was holding certain stock for the purpose of doing business of buying and selling and at the same time it was holding that other shares as its capital for the purpose of dividend income. These were duly recorded in separate accounts. Disallowance u/s 43B - SEBI registration fees - Held that - The assessee submitted that the said liability accrued in the previous year relevant to asst. yr. 2005-06 and therefore, it is so claimed in this year - Hon ble Calcutta High Court vide its order dt. 25th May, 2004 directed the stock brokers to pay the registration fees by adopting their own definition of turnover and thereafter SEBI formulated the scheme dt. 15th July, 2004 directing the broker to pay the fee.Therefore, the liability is settled in this year only and the same was accordingly claimed in this year hence need to be allowed. Regarding addition u/s 14A - Assessee was asked to explain why the proportionate administrative and management expenses incurred for earning the exempt income should not be disallowed under section 14A - Held that - As in the case of Godrej & Boyce Mfg. Co. v. Dy. CIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) has held that even when prior to asst. yr. 2008-09, when rule 8D was not applicable, the AO has to enforce the provisions of sub-section (1) of section 14A - AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record - Appeal is allowed by way of remand

Summary

Issues Involved:
1. Classification of income as capital gains versus business income.
2. Deductibility of SEBI registration fees.
3. Disallowance under Section 14A for exempt income.

Detailed Analysis:

1. Classification of Income as Capital Gains versus Business Income:
The primary issue was whether the income from share transactions should be treated as capital gains or business income. The assessee, a share broker, maintained separate accounts for shares held as stock-in-trade and those held as investments. The Assessing Officer (AO) treated the declared capital gains as business income, but the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed. The CIT(A) noted that the assessee had consistently maintained separate accounts for investments and trading, and the Department had accepted this practice in previous years. The CIT(A) directed the AO to accept the capital gains as declared by the assessee.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee maintained distinct accounts for investments and trading. The Tribunal referred to CBDT Circular No. 4 of 2007, which allows taxpayers to have separate portfolios for investment and trading, resulting in income under both heads: capital gains and business income. The Tribunal found no infirmity in the CIT(A)'s order and upheld it, confirming that the income should be treated as capital gains.

2. Deductibility of SEBI Registration Fees:
The second issue was whether the SEBI registration fee of Rs. 27.30 lakhs, incurred by the assessee, was deductible. The AO disallowed the fee, considering it a prior period expense. However, the CIT(A) allowed the deduction, noting that the liability was quantified in the relevant financial year following a directive from the Calcutta High Court. The CIT(A) also cited precedents from the Tribunal, Mumbai, which allowed similar deductions under Section 43B of the Income Tax Act.

The Tribunal agreed with the CIT(A), noting that the liability accrued in the assessment year 2005-06, following the Calcutta High Court's order and SEBI's subsequent scheme. Therefore, the Tribunal upheld the CIT(A)'s order, allowing the deduction of the SEBI registration fee.

3. Disallowance under Section 14A for Exempt Income:
The third issue involved the disallowance of Rs. 1.95 lakhs under Section 14A, related to expenses incurred for earning exempt income. The AO disallowed the amount on a proportionate basis, but the CIT(A) directed its deletion. The Tribunal referred to the Bombay High Court's decision in the case of Godrej & Boyce Mfg. Co. v. Dy. CIT, which mandates the AO to determine the expenditure related to exempt income on a reasonable basis, even before the applicability of Rule 8D.

The Tribunal remitted the issue back to the AO for fresh consideration, instructing the AO to adopt a reasonable method consistent with relevant facts and circumstances. The Tribunal also directed that the disallowance should not exceed Rs. 1.95 lakhs and that the assessee should be given an adequate opportunity to present its case.

Conclusion:
The appeals for the assessment year 2005-06 were partly allowed for statistical purposes, and the appeal for the assessment year 2006-07 was dismissed. The Tribunal upheld the CIT(A)'s decisions on the classification of income as capital gains and the deductibility of SEBI registration fees, while remitting the issue of disallowance under Section 14A back to the AO for reconsideration.