2016 (8) TMI 365 - AT - Income Tax

Income earned from the sale and purchase of shares - Assessed as Short term capital gains or as business income - Held that - Lending and borrowing being business of assessee and the assessee having surplus borrowed funds having invested in the share transaction would not change the status of the assessee from an investor to a trader in relation to share transactions carried out by it. There is not repetitive transaction and even the assessee from the income earned from the shares has invested the same in property. The major part of the funds of the assessee being invested either in mutual fund or in the property; over all activity of the assessee suggest that the funds have been used by the assessee for investment purposes only. We do not found any justification on the part of the lower authorities in treating the assessee as a trader in relation to the share transaction when in the earlier as well as in subsequent year, the assessee has been treated as investor in the shares. We accordingly direct the AO to treat the income of the assessee from share transaction as capital gains and not as business income of the assessee. Disallowance made u/s 14A r.w. Rule 8D - disallowance of expenditure incurred for the purpose of earning the tax exempt income - Held that - The Hon ble Delhi High Court in the case of Chem Investments vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT) has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression does not form part of the total income , in section 14A of the Act envisages that there should be an actual receipt of income which is not included in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income Disallowance u/s 14A is restricted to the dividend income earned of ₹ 46,260/- only.- Decided partly in favour of assessee

Summary

Issues Involved:
1. Determination of income from sale and purchase of shares as Short term capital gains or business income.
2. Disallowance made by the AO under section 14A r.w. Rule 8D regarding expenditure incurred for earning tax-exempt income.

Issue 1: Income from Sale and Purchase of Shares:
The primary issue in this case was whether the income earned from the sale and purchase of shares should be assessed as Short term capital gains or as business income. The assessee claimed the income as Short Term Capital Gain, but the AO treated it as business income due to the high volume of share transactions and lack of substantial holding period. The CIT(A) upheld the AO's decision, considering the share transactions as the main business activity of the assessee. However, the ITAT found that the assessee's conduct in previous and subsequent years, consistency in treatment as an investor, and lack of repetitive transactions supported the classification of the income as capital gains. The ITAT also noted that the borrowed funds used for investments did not change the assessee's status from investor to trader. Citing relevant court cases, the ITAT directed the AO to treat the income from share transactions as capital gains, not business income.

Issue 2: Disallowance under Section 14A r.w. Rule 8D:
The second issue pertained to the disallowance made by the AO under section 14A r.w. Rule 8D concerning expenditure for earning tax-exempt income. The AO computed a significant disallowance, which the CIT(A) partially confirmed. The assessee contested the remaining disallowance, arguing that it should be restricted to the exempt income earned during the year. The ITAT referred to court decisions emphasizing that the disallowance should only relate to expenditure incurred in relation to tax-exempt income and not the entire tax-exempt income. Considering the arguments and relevant legal precedents, the ITAT restricted the disallowance under section 14A to the dividend income earned by the assessee during the year. Consequently, the ITAT partly allowed the appeal of the assessee.

In conclusion, the ITAT ruled in favor of the assessee on both issues, directing the AO to treat the income from share transactions as capital gains and restricting the disallowance under section 14A to the dividend income earned during the year.