2016 (6) TMI 483 - AT - Income Tax

Assessment of income - capital gain v/s business income - Held that - To clarify the position the CBDT had come out with a Circular No.6/2016. We are of the view that the above Circular should settle the controversy in favour of the Assessee in the facts and circumstances of the case of the Assessee. We have already observed that the Assessee has been consistently maintaining two portfolio of shares one held as investments and the other held as stock-in-trade of business of dealing in shares. As far as the income on sale of shares held as investments is concerned the Assessee has always been declaring such income under the head Capital Gain and the same has been accepted by the revenue in the past assessments. - Decided against revenue Transaction of shares - whether the STCG on transaction of purchase and sale of shares undertaken by the assessee during the previous year is to be assessed under the head income from business as claimed by the revenue or income under the head capital gain as contended by the assessee? - Held that - The income in question has to be assessed under the head Short Term Capital Gain as declared by the Assessee Disallowance u/s 14A - Held that - As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores and investment were acquired at cost of 27.97 Crores. Therefore the disallowance of interest expenses of 16, 04, 669/- is directed to be deleted. As far as disallowance of other expenses under Rule 8D(2)(iii) of the Rules i.e. disallowance of other expenses is concerned income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. It cannot therefore be said that the revenue authorities were not justified in disregarding the disallowance made by the Assessee on its own by pointing out specific infirmity in the Assessee s working of the amount disallowable under Section 14A of the Act. Keeping in mind the above findings of the CIT(A) we are of the view that the disallowance of other expenses as sustained by the CIT(A) of 11, 42, 424 under rule 8D(2)(iii) of the Rules is proper and calls for no interference. We however clarify that the amount already disallowed by the Assessee in the computation of total income should again not be added. In other words the disallowance u/s.14A of the Act shall be only 11, 42, 424/-. - Decided partly in favour of assessee

Summary

Issues Involved:

1. Classification of income from sale of shares as business income or capital gains.
2. Applicability of Section 14A and Rule 8D for disallowance of expenses related to exempt income.
3. Consistency in treatment of income from sale of shares in different assessment years.

Detailed Analysis:

1. Classification of Income from Sale of Shares:

The Assessee, a company engaged in share broking, trading, and portfolio management, declared income from the sale of shares under two heads: business income and capital gains. The AO reclassified the short-term capital gains (STCG) of ?2,64,04,050 and long-term capital gains (LTCG) of ?8,25,00,965 as business income, arguing that the transactions were systematic and frequent, indicating a business activity rather than investment.

The CIT(A) upheld the AO's decision regarding STCG, considering factors such as high frequency of transactions, short holding periods, and the use of a single demat account. However, the CIT(A) accepted the LTCG as capital gains, noting the Assessee's consistent treatment of these shares as investments in past assessments.

The Tribunal, referencing the CBDT Circular No. 6/2016, which states that gains from shares held for more than 12 months should be treated as capital gains if so claimed by the Assessee, upheld the CIT(A)'s decision on LTCG. For STCG, the Tribunal emphasized the principle of consistency, noting that similar transactions in previous years were treated as capital gains. Therefore, the Tribunal ruled that STCG should also be treated as capital gains.

2. Applicability of Section 14A and Rule 8D:

The AO disallowed expenses under Section 14A read with Rule 8D, totaling ?33,72,458, related to earning exempt income (dividends). The Assessee had initially disallowed ?3,29,313, including direct expenses like demat charges and a portion of salaries.

The CIT(A) confirmed the AO's application of Rule 8D but provided a revised calculation, reducing the disallowance to ?30,98,586 after adjusting for the Assessee's own disallowance. The Tribunal agreed with the CIT(A) on disallowing interest expenses under Rule 8D(2)(ii), noting that the Assessee had sufficient own funds to cover investments, thus no interest disallowance was warranted. However, the Tribunal upheld the disallowance of other expenses under Rule 8D(2)(iii), amounting to ?11,42,424, emphasizing the scale of operations and the need for a reasonable allocation of expenses.

3. Consistency in Treatment of Income:

The Tribunal highlighted the importance of consistency in tax treatment across different assessment years, referencing the Bombay High Court's decision in CIT vs. Gopal Purohit, which supported the principle of uniformity in similar circumstances. The Tribunal noted that the Assessee's treatment of income from share transactions as capital gains had been accepted in previous and subsequent years. Therefore, the Tribunal ruled in favor of the Assessee, maintaining the classification of income from share transactions as capital gains for the assessment year in question.

Conclusion:

The Tribunal upheld the CIT(A)'s decision to treat LTCG as capital gains and reclassified STCG from business income to capital gains, emphasizing consistency and the Assessee's historical treatment of such transactions. The Tribunal also modified the disallowance under Section 14A, deleting the interest disallowance while upholding the disallowance of other expenses. The appeals by the Assessee were partly allowed, while the appeal by the Revenue was dismissed.