2016 (12) TMI 1002 - AT - Income Tax

Gains arising on sale of shares - business income or capital gain - Held that - Assessee has purchased and sold higher number of shares in respect of 12 scrips only, meaning thereby, the volume cannot be taken to be high. We notice that holding period of shares for major portion of shares is reasonable. We further notice that the assessing officer has accepted the profit as Capital gains in AY 2009-10 and 2013-14 in the scrutiny assessment made u/s 143(3) of the Act. There is no reason to assess the capital gains arising on sale of shares as business income. On a cumulative consideration of various factors, we are of the view that the assessee has acted as an investor only in respect of the impugned transactions. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess the gains arising on sale of shares under the head Capital gains only. Disallowance made u/s 14A - Held that - A perusal of the statements of total income of the assessee would show that the assessee did not claim any expenditure against any income. The question of apportionment of expenses between taxable income and exempt income would arise only if any expenditure is claimed by the assessee. Hence we are unable to agree with the view taken by the Ld CIT(A) that the provisions of Rule 8D provide for deemed disallowance . It is well established proposition now that the assessing officer can resort to compute disallowance under Rule 8D only if he is not satisfied with the computation made by the assessee having regard to the accounts of the assessee. Since the assessee has not claimed any expenditure, in our view, there is merit in the contentions of the assessee that no disallowance u/s 14A is called for.

Summary

Issues:
1. Assessment of short term capital gain arising from sale of shares as business income.
2. Disallowance made u/s. 14A of the Act.

Assessment of short term capital gain as business income:
The appeal was against the order assessing short term capital gain from share sales as business income. The assessee declared a total income with short term capital gain, which the AO assessed as business income due to systematic trading activity. The CIT(A) upheld this view. The AR argued the assessee acted as an investor based on various criteria. The AR highlighted no interest-bearing borrowings, own funds exceeding share investment, delivery-based transactions, limited scrips, and past acceptance of gains as capital gains. The AR also cited circulars supporting investment treatment. The DR supported the CIT(A). The Tribunal noted interest-free family funds, low dividend income, limited scrips traded, reasonable holding periods, and past acceptance of gains as capital gains. Concluding the assessee acted as an investor, the Tribunal directed the AO to assess gains as capital gains.

Disallowance u/s. 14A of the Act:
The dispute involved disallowance under Rule 8D for expenses related to exempt income. The assessee claimed no expenses, contesting any disallowance u/s. 14A. Tax authorities argued for a deemed disallowance under Rule 8D. The Tribunal disagreed, stating Rule 8D applies when the AO is unsatisfied with the assessee's computation. Since the assessee claimed no expenses, the Tribunal ruled no disallowance u/s. 14A was warranted, directing the AO to delete the disallowance. The appeal was allowed on both issues, with the Tribunal's order pronounced on 20.10.2016.