2015 (10) TMI 750 - HC - Income Tax

Gains from the purchase and sale of shares and mutual funds - treated as Long Term Capital gains or business income - Held that - Twin test applied by the Assessing Officer and the CIT (A) to hold that the respondent-assessee is a trader in shares and mutual funds is not correct. As pointed out above, as per CBDT circular No.4/2007 dated 15 June 2007 it is open to the respondent-assessee to hold the securities in two portfolios i.e. one investment portfolio and another trading portfolio. There is no bar under the Act which prevents the assessee from investing partly as investment and partly for trading in the same scrip. Besides, the second test namely that it is at the sole discretion of the respondent to determine whether a particular scrip is to be treated as an investment or a scrip in which he trades, is permissible in terms of the Circular No.4/2007 dated 15 June 2007. It is for the respondent assessee to determine how he seeks to treat a particular scrip i.e. as an investment or for trading. This intent would only be reflected in maintaining different accounts for the two. There is no allegations of shifting of scrips from trading to investment or vice versa. Moreover, it is also pertinent to note that the respondent assessee had shown all its scrips treated as investments at cost, while those held as stock-in-trade were shown at cost or market value whichever is low. This again is an indication of the fact that the respondent assessee held the scrips offered for tax under the head long term capital gains as investment. Further Assessee submission that so far as the long term capital account is concerned, even during the preceding assessment year, the percentage of tax charged on it was lower than that taxed on business income is not disputed by Revenue. Therefore, the issue arising in this Assessment Year should also have been a subject of enquiry in the assessment order passed in respect of preceding assessment year. Therefore, even on the principle of consistency no fault can be found with the impugned order. For the above reasons, we are of the view that the view of the Tribunal is a reasonable and possible view. Gains treated as Long Term Capital gains - Decided in favour of assessee. Disallowance under Section 14A r.w.r 8D - ITAT deleted the addition relying on case of Godrej & Boyce Mfg. Co.Ltd., 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein it is held that Rule 8D is prospective and applicable only from the AY 2008-09 - Held that - The impugned order of the Tribunal has, merely followed the binding decision of this Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT suora - Thus, Question does not raise any substantial question of law and, therefore, not entertained. - Decided in favour of assessee.

Summary

Issues:
1. Whether gains from the purchase and sale of shares and mutual funds should be treated as Long Term Capital gains or business income?
2. Whether the disallowance made under Section 14A of the Income Tax Act should be set aside?

Analysis:
*Issue 1:*
The main contention in this case was whether the gains from the purchase and sale of shares and mutual funds by the respondent should be treated as Long Term Capital gains or business income. The Assessing Officer and the CIT(A) considered the respondent as a trader in shares, thereby taxing the gains as business income. However, the Tribunal held that the respondent maintained separate portfolios for trading and investment, as permitted by CBDT circular No.4/2007. The Tribunal observed that the respondent consistently valued shares held as investments at cost, while those held as stock-in-trade were valued at cost or market value, indicating a clear distinction. The Court agreed with the Tribunal's reasoning, emphasizing that there is no prohibition on an assessee from holding securities in two portfolios. The Court also noted that the tax rate on long term capital gains was lower than that on business income in previous assessment years, supporting the respondent's claim. Consequently, the Court found the Tribunal's decision reasonable and upheld it.

*Issue 2:*
Regarding the disallowance made under Section 14A of the Income Tax Act, the Tribunal followed the precedent set by the Bombay High Court in 'Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (328 ITR 81)', which stated that Rule 8D is applicable only from the Assessment Year 2008-09. As the Tribunal's decision aligned with the binding precedent, the Court found no substantial question of law in this regard and dismissed the appeal.

In conclusion, the Court dismissed the appeal by the Revenue, upholding the Tribunal's decision on both issues.