2016 (9) TMI 642 - AT - Income Tax

Disallowance u/s 14A - Held that - Disallowance u/s 14A was made without due deliberation and analysis by the Assessing Officer and the Ld. CIT(A) was also patently wrong in confirming the disallowance without testing the sustainability of the disallowance. Hence, we set aside the findings of the Ld. CIT (A) on this issue and restore the matter to the file of the AO for fresh adjudication after due verification of the claim of the assessee regarding no expenditure having been incurred. Needless to say, the AO shall afford a proper opportunity to the assessee to present its case. This ground of appeal is accordingly allowed for statistical purposes. Capital gains v/s business income - sale of rights - Held that - The assessee has not shown the rights in the property as stock-in-trade. No opening and closing stock was shown by the assessee. Since the Registry of the rights was not done, the assessee had shown the same under the head loans and advances . It is undisputed that the assessee has entered into only one transaction of sale. The rights were purchased in 2005 and were sold in 2008 after retaining the rights for more than three and a half years. It is also undisputed that the assessee has been in receipt of rental income from other properties in subsequent assessment years which have been duly mentioned in the respective assessment orders. Hence, we are of the concerned opinion that the surplus resulting from the sale of rights is assessable to tax only as capital gains and not as business income because the Department has not been able to demonstrate that purchase and sale of the rights was affected in the usual course of carrying on the business of the assessee. The frequency of the purchase and sale is isolated in the case of the assessee and, therefore, there is no reason to allege that this was only a device to pay lesser taxes. It is also seen from the records that the assessee company is in the practice of passing separate resolutions for making investment in properties/rights. In our considered view, the assessee has discharged its primary onus by showing that the sale of rights was not in the regular course of business or trade but rather an isolated transaction and now the onus was on the Revenue to show that the apparent was not real. No material whatsoever has been brought on record by the Revenue to show that the transaction was only a smoke screen to camouflage the trading receipts. Therefore, in absence of any material to the contrary and on appreciation of cumulative effect of several factors present we hold that the surplus is chargeable to capital gains only and not as business income. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Treatment of capital gains as business income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The assessee contested the addition of ?407,158/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that no expenditure was incurred for earning exempt income since no dividend was received during the relevant year. The AO had applied Rule 8D mechanically without verifying the actual expenditure. The Delhi High Court in CIT vs. Holcim India P. Ltd. emphasized that disallowance under Section 14A is not tenable without actual expenditure. The Tribunal noted that Section 14A requires a proximate relationship between the expenditure and the exempt income. The AO must determine if any expenditure was incurred in relation to exempt income and quantify the disallowance accordingly. The Tribunal found that the AO did not provide justification for the disallowance and merely presumed the expenditure. The Tribunal cited the Delhi High Court's decision in Maxopp Investment Ltd. vs. CIT, which mandates that the AO must record dissatisfaction with the assessee's claim before determining the expenditure. The Tribunal also referred to the Punjab & Haryana High Court in CIT-II vs. Hero Cycles Ltd., which held that disallowance under Section 14A requires a finding of incurred expenditure. Consequently, the Tribunal set aside the CIT(A)'s findings and remanded the matter to the AO for fresh adjudication after verifying the assessee's claim of no expenditure.

2. Treatment of Capital Gains as Business Income:

The assessee challenged the treatment of ?9,139,000/- capital gains as business income by the AO, which was upheld by the CIT(A). The assessee argued that the rights in the property were held for long-term investment, evidenced by the duration of ownership (over three and a half years) and the absence of modifications to make the property marketable. The Tribunal referred to the Bombay High Court in CIT vs. V.A. Trivedi, which stated that the nature of the transaction, intention at the time of purchase, and subsequent dealings are crucial in determining whether it is a trading activity or investment. The Tribunal also cited the Madras High Court in V. Ramanathan vs. CIT, which emphasized the commercial character of the venture. The Tribunal noted that the assessee did not show the rights as stock-in-trade and retained them for more than three and a half years, indicating investment rather than trading. The Tribunal highlighted that the assessee earned rental income from other properties, supporting the investment intention. The Tribunal concluded that the surplus from the sale of rights should be assessed as capital gains, not business income, as the Department failed to demonstrate that the transaction was in the usual course of business. The Tribunal allowed the assessee's appeal on this ground.

Conclusion:

The Tribunal allowed the assessee's appeal, setting aside the disallowance under Section 14A and remanding it to the AO for fresh adjudication. It also ruled that the surplus from the sale of rights should be treated as capital gains, not business income. The decision was pronounced in the open court on 05/08/2016.