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2012 (12) TMI 599 - AT - Income TaxDisallowance u/s 14A r.w. Rule 8D of expenditure incurred on earning exempt income Held that - Total expenditure debited by the assessee in its P&L account for the year ended 31.3.2008 is only Rs.1,68,385 and out which, assessee itself disallowed a sum of Rs.1,06,897 while computing its income leaving a balance sum of Rs.61,488 which was duly explained in respect of taxable income. Therefore no such disallowance shall be allowed. Appeal decides in favour of assessee Sale of share taxable as capital gain or business income - Assessee has only four scripts of shares and out of which scripts of shares of three companies were purchased in the preceding assessment year and only share of one company was purchased during the year - Assessee sold the said shares of all four companies in the assessment year under consideration - Held that - Neither the frequency nor volume of transaction could be said to be very high and the period of holding is also substantial. Therefore, the income of the assessee from purchase and sale of share transactions is to be assessed under the head capital gain and not under the head business income . issue decides in favour of assessee
Issues Involved:
1. Deletion of disallowance under Section 14A as per Rule 8D. 2. Treatment of short-term capital gains as business income. Detailed Analysis: Issue 1: Deletion of Disallowance under Section 14A as per Rule 8D Background: The Assessing Officer (AO) disallowed Rs. 2,20,331 under Section 14A read with Rule 8D, stating that the assessee had earned dividend income of Rs. 1,88,645, which was claimed as exempt under Section 10(34). The AO argued that the assessee had incurred expenses related to earning this exempt income. Assessee's Argument: The assessee contended that it had incurred total expenses of Rs. 1,68,050 during the year, out of which Rs. 1,06,897 was already disallowed in the computation of income, leaving a balance of Rs. 61,488. It was further argued that Rs. 42,208 of this balance was for maintaining the company's status, and the remaining Rs. 18,945 was for general company activities, not for earning dividend income. CIT(A)'s Decision: The CIT(A) accepted the assessee's contention and deleted the disallowance made by the AO. Tribunal's Analysis: The Tribunal found that the total expenditure debited by the assessee was Rs. 1,68,385, out of which Rs. 1,06,897 was already disallowed by the assessee, leaving Rs. 61,488. The Tribunal observed that no part of this expenditure was incurred for earning dividend income. It upheld the CIT(A)'s order, agreeing that no further disallowance was warranted under Section 14A. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 2,20,331 under Section 14A, rejecting the department's appeal on this ground. Issue 2: Treatment of Short-Term Capital Gains as Business IncomeBackground: The assessee reported short-term capital gains of Rs. 2,22,69,502 from the sale of shares. The AO treated these gains as business income, arguing that the transactions involved bulk trading and were not in the nature of investments. Assessee's Argument: The assessee argued that the gains were from only four scrips, held for periods ranging from two to ten months, and were shown as investments in the balance sheet. It was also argued that the investments were made from own funds, not borrowed funds. CIT(A)'s Decision: The CIT(A) held that the AO was not justified in treating the capital gains as business income. The CIT(A) relied on the ITAT Mumbai decision in Janak S. Rangwala and CBDT Circular No. 4 of 2007, concluding that the transactions were investments, not business transactions. Tribunal's Analysis: The Tribunal noted that the assessee had only four scrips, three of which were purchased in the preceding year and sold in the current year. The Tribunal observed that the period of holding ranged from two to ten months, and the transactions were not frequent or organized in a manner characteristic of trading activity. The Tribunal also noted that the AO had not demonstrated how the cited case laws applied to the assessee's facts. Conclusion: The Tribunal upheld the CIT(A)'s decision, agreeing that the gains should be treated as short-term capital gains and not as business income. The department's appeal on this ground was also rejected. Final Outcome:Result: The appeal filed by the department was dismissed in its entirety.
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