2014 (6) TMI 329 - AT - Income Tax

Sale of investment in shares Business income OR STCG Assessee being as trader or investor - Held that - The assessee is a partner in M/s. Kamdar & Co., M/s. Mahek Investments, K. Amishkumar & Co., and M/s. Hamsa Trading Co., from where he is deriving share of profit and interest on capital Relying upon P.M. Mohammed Meerakhan (P.M.) v/s CIT 1969 (2) TMI 4 - SUPREME Court - it was not possible to evolve any single test or formula which could be applied in determining the transaction as adventure in nature of trade or not - The distinction between the two types of transaction is not always easy to make - Whether the transaction is of one kind or the other depends on the question whether the excess is an enhancement of the value by realizing the security or a gain in an operation of profit making. The assessee might have invested capital in shares with an intention to resale these if in future their sale brings in a higher price - Such an investment though motivated by a possibility of enhancement value, did not necessarily render the investment a transaction in the nature of trade there was no reason as to why the profit should not be taxed under the head Short term capital gain as returned by the assessee thus, the order of the CIT(A) is set aside and the AO is directed to tax the profit arising from the sale of shares under the head Short term capital gain as shown by the assessee Decided in favour of Assessee. Disallowance u/s 14A r.w. Rule 8D of the Act Held that - The assessee has own capital of Rs. 6.31 crores - Computation of income of the assessee show that the assessee has earned interest at Rs. 44.20 lakhs out of which interest paid claimed as deduction at Rs. 21.36 lakhs - Dividend income received by the assessee is Rs. 7.19 lakhs - Long Term Capital gain is at Rs. 9.19 lakhs and share of profit from firms is at Rs. 36.85 lakhs - These incomes have been claimed to be exempt from tax - Rule 8D is applicable from A.Y. 2008-09 as it has already been decided in Godrej & Boycee Manufacturing Co. Ltd. Vs DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT thus, the AO is directed to disallowance of 5% of the exempt income Decided partly in favour of Assessee.

Summary

Issues:
1. Classification of gain on sale of shares as business income or short term capital gain.
2. Determination of whether the assessee is a trader in shares or an investor.
3. Disallowance of expenses under section 14A r.w. Rule 8D.

Issue 1: Classification of Gain on Sale of Shares:
The Assessing Officer (AO) treated the Short Term Capital Gain (STCG) of the assessee as business income due to the perceived dominant intention of making a profit from frequent purchase and sale of shares. The AO also disallowed expenses under section 14A r.w. Rule 8D. The assessee contended that most shares were held for over 100 days, were shown as investments in the balance sheet, and not acquired with borrowed funds. The CIT(A) upheld the AO's findings, stating that the series of transactions indicated a business activity of trading shares for profit. However, the ITAT disagreed, noting the low frequency of transactions, past acceptance of capital gains, and lack of evidence to suggest trading activity. The ITAT directed the AO to tax the profit as Short Term Capital Gain, allowing the appeal.

Issue 2: Determination of Trader vs. Investor:
The AO's belief that the assessee was a trader was based on the perceived intention to book profits through sequential share transactions. The CIT(A) supported this view, emphasizing the systematic trading pattern. However, the ITAT disagreed, citing the low transaction frequency, past acceptance of capital gains, and lack of evidence supporting trading activity. The ITAT concluded that the profit should be taxed as Short Term Capital Gain, considering the volume and frequency of transactions and the assessee's history.

Issue 3: Disallowance under Section 14A r.w. Rule 8D:
The AO computed a disallowance under section 14A r.w. Rule 8D for expenses related to exempt income. The CIT(A) upheld this disallowance, but the ITAT reduced it to 5% of the exempt income, directing the AO to restrict the disallowance accordingly. The ITAT considered the assessee's own capital, income sources, and the applicability of Rule 8D from A.Y. 2008-09, providing relief to the assessee.

In conclusion, the ITAT partially allowed the appeal, directing the AO to tax the profit as Short Term Capital Gain, rejecting the trader classification, and reducing the disallowance under section 14A r.w. Rule 8D.