2014 (1) TMI 231 - AT - Income Tax

Whether transactions in shares be considered as trading activity - Held that - Assessee filed a complete details of long term capital gains on sale of shares and short term capital gains on sale of shares for the relevant years - Holding period is from 1 year to 10 years in some cases and even in some cases it is 15 years - The accounting treatment given by assessee has never been disturbed by revenue - In earlier years and in future years assessee s contention for all along been accepted - The systematic investment is nothing but investment not trading - Following CIT Vs. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - When the factual position is very clear in the case that the assessee is holding the shares as an investment and the profit arising out of sale of shares is capital gains either long term or short term - The gains on account of transfer of shares shall be treated as capital gains as against business income assessed by the A.O - Decided against Revenue. Disallownace u/s 14A - Held that - The CIT(A) was not justified in not directing the assessing officer to recompute disallowances as the calculations made by him under Rule 8D (2) (ii) and (iii) were erroneous as he computed these disallowances on the entire amount of investments appearing in the balance sheet instead of taking the average of value of those investments, the income from which does not/ shall not form part of the total income, as provided in Rule 8D - Decided in favour of assessee.

Summary

Issues:
1. Treatment of profit from sale of shares as capital gains instead of business income.
2. Disallowance of indirect expenses u/s. 14A of the Income Tax Act.

Issue 1: Treatment of profit from sale of shares as capital gains instead of business income:
The appeals by the revenue and cross objections by the assessee arose from the order of CIT(A) regarding the treatment of profit from the sale of shares as capital gains instead of business income. The AO assessed capital gains declared by the assessee as business income due to systematic share transactions with a profit motive. However, the CIT(A) accepted the contention that the assessee's intention was to hold shares as investments for dividend and appreciation, supported by consistent treatment by the assessee and revenue in previous and subsequent years. The CIT(A) relied on various case laws emphasizing the importance of the assessee's intent in distinguishing between trading and investment activities. The tribunal upheld the CIT(A)'s decision, considering the long-term holding periods, the systematic investment approach of the assessee, and the consistent treatment by the revenue in previous and future years.

Issue 2: Disallowance of indirect expenses u/s. 14A of the Income Tax Act:
The cross objections by the assessee challenged the CIT(A)'s confirmation of the disallowance of indirect expenses under section 14A of the Income Tax Act. The grounds raised by the assessee questioned the excess disallowance beyond the actual expenses claimed and the computation errors under Rule 8D (2) (ii) and (iii). The tribunal noted that Rule 8D did not apply to the assessment years in question but directed the AO to recompute the disallowance at 1% of the exempted income, limiting the disallowance to that extent. As a result, the cross objections of the assessee were partly allowed in this regard.

In conclusion, the tribunal upheld the CIT(A)'s decision regarding the treatment of profit from the sale of shares as capital gains and dismissed the revenue's appeals. The tribunal also partly allowed the cross objections of the assessee concerning the disallowance of indirect expenses under section 14A of the Income Tax Act.