2014 (7) TMI 427 - AT - Income Tax

Treatment of income Capital gain or business income Assessee Trader or investor in shares Held that - The decision in Asst. Commissioner of Income Tax Versus M/s Passionate Investments Management Pvt. Ltd. 2013 (8) TMI 136 - ITAT MUMBAI followed - the total number of transaction is 68 out of which 40 transactions relate to LTCG - 15 transactions relate to STCG and 30 transactions relate to close out transaction of STCG - The total number of scrips dealt by the assessee is 26 - average holding period for capital gains is 37 days or 1.75 years - The average holding period for STCG is 217 days revenue has accepted the profit under the head capital gain - the reasoning given by the AO and the Commissioner (Appeals) are akin to that of the earlier years the order of the CIT(A) is upheld that the income derived by the assessee from the transactions of the shares is to be taxed under the head capital gain and not income from business Decided against Revenue. Restriction of disallowance u/s 14A r.w. Rule 8D of the Act Administrative expenses Held that - The assessee submitted that the working of computation of disallowance and also the expenses which can be said to be directly attributable to the other business activities CIT(A) was of the view that the AO should disallow the administrative expenditure as per rule 8D(2)(iii), the disallowance should not exceed the total administrative expenditure incurred there was no infirmity in the order passed by the CIT(A) as the disallowance u/s 14A, cannot exceed the total administrative expenditure debited by the assessee in the Profit & Loss account - Even under the formula given in rule 8D, the disallowance cannot exceed the overall expenditure claimed in the Profit & Loss account Decided against Revenue.

Summary

Issues:
1. Classification of income from the sale of shares as capital gain or business income.
2. Disallowance under section 14A for administrative expenses.

Issue 1: Classification of Income from Sale of Shares
The Revenue challenged the order passed by the Commissioner (Appeals) regarding the classification of income from the sale of shares as capital gain instead of business income for the assessment year 2009-10. The Revenue argued that the assessee, being a trader in shares, should have the income treated as business income. The Assessing Officer rejected the assessee's contention based on various grounds, including the continuous and systematic trading activity, borrowing of funds for share transactions, and lack of definitive reasons for purchase and sale. The Commissioner (Appeals) noted the past decisions and comparative details of transactions to conclude that the income should be taxed as capital gain, consistent with earlier years. The Tribunal upheld the Commissioner (Appeals)'s decision, citing the factual situation, average holding periods, and past acceptance of capital gains in the assessee's case as reasons for dismissing the Revenue's appeal.

Issue 2: Disallowance under Section 14A
The assessee earned long term capital gains and dividend income, claiming certain expenditures as related to investment activities. The Assessing Officer disallowed expenses under rule 8D, resulting in a disallowance of a specific amount. The Commissioner (Appeals) held that the disallowance should not exceed the total administrative expenditure incurred by the assessee. The Tribunal affirmed the Commissioner (Appeals)'s decision, stating that the disallowance under section 14A cannot exceed the total administrative expenditure debited by the assessee in the Profit & Loss account, and that the disallowance should not surpass the overall expenditure claimed in the Profit & Loss account. Consequently, the Tribunal dismissed the Revenue's appeal on this issue as well.

In conclusion, the Tribunal upheld the Commissioner (Appeals)'s decision on both issues, affirming the classification of income from the sale of shares as capital gain and the limitation of disallowance under section 14A for administrative expenses.