2012 (12) TMI 209 - AT - Income Tax

Disallowance under section 14A of the Act - alleged that the assessee had not made any submission of expenses relating to investment or dividend of income, though indisputedly, certain expenses are bound to have incurred for earning the dividend income - Held that - In terms of section 14A(2) of the Act, the condition precedent for the AO to determine the amount of expenditure incurred in relation to exempt income is that he must record his dis-satisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure had been incurred - determination of the amount of expenditure in relation to exempt income under Rule 8D of the Rules would only come into play when the AO rejects the claim of the assessee in this regard - assessment order does not evince any such dis-satisfaction of the AO with regard to the claim of the assessee that no expenditure had been incurred - matter is remitted to the file of the AO to be decided afresh in accordance with law Sale of shares Business income or capital gain alleged that assessee company engaged in the business of purchase and sale of shares, showed part of the purchase and sale in its profit and loss account Held that - Shares/securities in the nature of capital asset are shown under the head Long Term Investment and accordingly gain/loss thereon is shown under the head capital gain - shares/securities in nature of trading/revenue assets that is held for disposal in the ordinary course of business are classified under the head current investment and accordingly profit and loss thereon is shown under the head income from business and profession - there was no occasion, as such, to conclude that all disposal of shares, whether under stock in trade or as investment, should be assessed only as the business income of the assessee, merely for the fact that the assessee was a trader in shares Disallowance of interest expenditure on account of alleged non-business use of the borrowed funds alleged that the assessee had borrowed funds and had given interest free loans to its sister concerns Held that - no evidence was brought on record by the AO to show any divergence of funds by the assessee to its sister concerns. No disallowance of interest was called for either in respect of interest on Marging Financing or regarding interest on vehicle loan - Schedule 10 of the accounts which shows a total of Rs. 7,28,217/- by way of interest and financial charges, does not depict any interest by way of corporate loans - No part of the sale proceeds executed on account of Fortis has been proved to have been diverted to parties who have been providing interest free advances - interest on vehicle loan, these had been provided to City Finance and ABN Amro Bank. Again, there is nothing on record to suggest the assessee having diverted these loans to the account of the parties that had been providing interest free advances - appeal filed by the assessee is treated as allowed for statistical purposes

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of income from purchase and sale of shares as Short Term Capital Gain or business income.
3. Disallowance of interest expenditure under Section 37(1) of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The Assessing Officer (AO) made a disallowance of Rs. 20,51,591/- under Section 14A, estimating 25% of the dividend income of Rs. 82,06,366/- as expenses related to earning the dividend. The AO cited administrative expenses, DMAT fees, and personnel costs as reasons for the disallowance. The CIT(A) upheld the disallowance, stating no submission was made by the assessee regarding this issue. However, upon review, it was found that the assessee had indeed made submissions, which were not considered. The Tribunal referred to the "Maxopp Investment Ltd. V. CIT" decision, emphasizing that the AO must record dissatisfaction with the assessee's claim before making a disallowance under Section 14A. Since the AO did not record such dissatisfaction, the Tribunal remitted the matter back to the AO for reconsideration in line with the "Maxopp Investment Ltd. V. CIT" decision.

2. Treatment of Income from Purchase and Sale of Shares:
The AO treated the income of Rs. 46,27,931/- from the sale of shares as business income, rejecting the assessee's claim of it being Short Term Capital Gains. The AO argued that the shares were held for a short term and were part of the assessee's trading activity. The CIT(A) reversed this decision, noting that the assessee had consistently maintained dual portfolios for trading and investment purposes, a practice accepted by the Department in previous years. The Tribunal upheld the CIT(A)'s decision, citing the principle of consistency and the assessee's long-standing practice of segregating trading and investment portfolios. The Tribunal also referred to the relevant case law and circulars supporting the assessee's position, including the "CIT (Central) v. Associated Industrial Development Co. Pvt. Ltd." and Circular No. 4/2007 dated 15.6.2007.

3. Disallowance of Interest Expenditure under Section 37(1):
The AO disallowed Rs. 7,28,217/- of interest expenditure, claiming the borrowed funds were used for non-business purposes. The assessee argued that the interest was related to vehicle finance charges and margin financing for shares purchased, both used for business purposes. The CIT(A) accepted the assessee's explanation, noting no evidence of funds being diverted for non-business use. The Tribunal upheld the CIT(A)'s decision, finding no error and emphasizing the lack of evidence for fund diversion. The Tribunal also noted that the interest expenses were correctly categorized and related to business activities.

Conclusion:
The Tribunal remitted the issue of disallowance under Section 14A back to the AO for fresh consideration, upheld the CIT(A)'s decision on treating the income from the sale of shares as Short Term Capital Gains, and confirmed the CIT(A)'s decision on the disallowance of interest expenditure. The assessee's appeal was allowed for statistical purposes, and the Department's appeal was dismissed.