2015 (7) TMI 679 - AT - Income Tax

Income arising out the sale of share/unit - Capital gain or Business income - conversion of stock-in-trade into investment - Held that - We have gone through ledger accounts of the assessee for the year under consideration and noticed separate ledger accounts in respect of conversion of stock-in-trade into investment. By converting the stock-n-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. By bringing in stock-in-trade under the head investment the assessee could reduce the tax incidence considerably. The activity of trading in shares carried out separately in the AY 2004-05 and again brought forward to be continued in the next AY i.e. 2005-06 under the head investment is to be considered as trading activity only. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. Accordingly, the profit that has been attributable to this trading activity corresponding to conversion of stock-in- trade into investment is to be treated as business income and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as capital gains and conversion of stock-in-trade to investment is to be taken as trading income , which is based on facts of the case and need no disturbance. Accordingly, we confirm the findings of CIT(A). - Decided against revenue. Disallowance on travelling and conveyance charges - CIT(A) allowed claim - Held that - As seen from the assessment order except questioning the rationality of the expenditure in the absence of carpet business, the AO has not brought on record any material evidence to dispute the reasonability and purpose of the expenditure incurred. As argued by the assessee, the AO has not disproved expenditure incurred nor proved such expenditure was personal in nature or capital in nature. The books of accounts are audited and auditors have not pointed out any discrepancies in the nature of personal expenses or capital expenditure debited to profit and loss account. During the course of hearing, the Ld. counsel for the assessee clarified that the expenditure incurred on travelling and conveyance was mainly on account of foreign tour to interact with business people and to explore the prospects of export in carpets and garments which is otherwise the main line of business activity of the assessee. Accordingly, we confirm the order of CIT(A).- Decided against revenue. Disallowance u/s 14A and new Rule 8D (2)(iii) - Held that - Since CIT(A) confirmed the disallowance at 10% made by the AO but we are consistently taking a view that prior to AY 2008-09, disallowance @1% will meet the end of justice, by following the decision of co-ordinate Bench C Kolkata cited (2011 (4) TMI 1283 - ITAT KOLKATA). This ground of assessee s CO is partly allowed.

Summary

Issues Involved:

1. Delay in filing the appeal by Revenue.
2. Treatment of income from sale of shares as Long Term Capital Gains (LTCG) versus business income.
3. Disallowance of travelling and conveyance charges.
4. Disallowance of expenses related to exempt income under Section 14A and Rule 8D(2)(iii).

Detailed Analysis:

1. Delay in Filing the Appeal by Revenue:

At the outset, it was noted that the Revenue's appeal was barred by 20 days. However, a condonation petition was filed explaining that the delay was due to a typographical error regarding the date of communication of the CIT(A)'s order. The respondent did not object, and it was concluded that the appeal was within time.

2. Treatment of Income from Sale of Shares as LTCG versus Business Income:

The primary issue was whether the income from the sale of shares should be treated as LTCG or business income. The assessee-company, engaged in various businesses including shares and stocks, reported the income from the sale of shares as LTCG. The Assessing Officer (AO) treated this income as business income, arguing that the transactions were systematic and in the nature of business.

The CIT(A) ruled in favor of the assessee, treating the profits as LTCG based on the original intention to hold shares as investments, as evidenced by entries in the books and balance sheet. However, the CIT(A) also noted that the conversion of stock-in-trade to investment and back again should be treated as business income.

The Tribunal confirmed the CIT(A)'s findings, emphasizing the assessee's initial intention to hold shares as investments. The Tribunal noted that the volume and frequency of transactions did not alter the nature of the transactions from investment to trading. However, the Tribunal agreed that the profit attributable to the conversion of stock-in-trade to investment should be taxed as business income.

3. Disallowance of Travelling and Conveyance Charges:

The AO disallowed 10% of the travelling and conveyance expenses, arguing that the main business of the assessee (carpet trading) had ceased. The CIT(A) deleted this disallowance, and the Revenue appealed.

The Tribunal upheld the CIT(A)'s decision, noting that the expenses were incurred to explore the possibility of reviving the carpet export business. The Tribunal found no evidence that the expenses were personal or capital in nature and confirmed they were incurred wholly and exclusively for business purposes.

4. Disallowance of Expenses Related to Exempt Income under Section 14A and Rule 8D(2)(iii):

The AO estimated a disallowance of Rs. 6,37,182 under Section 14A, which the CIT(A) confirmed by applying Rule 8D(2)(iii). The assessee argued against this, citing that the assessment was completed before the insertion of Rule 8D.

The Tribunal referred to a previous decision, restricting the disallowance to 1% of the dividend income. Following this precedent, the Tribunal restricted the disallowance to 1% of the dividend income, thereby partly allowing the assessee's Cross Objection.

Conclusion:

The appeal by Revenue was dismissed, and the Cross Objection by the assessee was partly allowed. The Tribunal upheld the CIT(A)'s decisions on the treatment of income from the sale of shares and the disallowance of travelling and conveyance charges. However, it modified the disallowance related to exempt income, restricting it to 1% of the dividend income.