2017 (2) TMI 589 - AT - Income Tax

Treatment of quantum capital loss as speculation loss in terms of provision of Explanation to Section 73 - Held that - After considering the volume, frequency and quantum of transactions, Authorities Below presumed that assessee was carrying out the activity of business. Therefore the profit and loss on such transactions should be treated as under the head business . Admittedly, we find that that there is no dispute with regard to treatment of the aforesaid transactions in the books of account of assessee and aforesaid transactions were classified by assessee under the head investment and such practice was also followed by assessee in the earlier year also. The activities through Portfolio Management Scheme (PMS) cannot be regarded as business activities on standalone basis. There are other factors which need to be considered. In the instant case the Revenue has been harping to treat the share transaction activity as business activity as the assessee has availed the services of PMS to maximize the profit. At the end we conclude that the assessee has been showing income under the head capital gains from the sale-purchase of securities which is held for a period more than 12 months consistently then the same has to be treated as income under the head capital gains only. Similarly, the transactions for the sale-purchase shares carried out through PMS cannot be regarded as business transactions for the reasons discussed above. Therefore, we are inclined to reverse the order of Authorities Below - Decided n favour of assessee Disallowance u/s 14A r.w.s. 8D - Held that - The assessee has claimed total expenditure of ₹ 4,14,08,065/-. Out of the same a sum of ₹ 2 crores was donated to charitable trust which in our considered view has no nexus with the dividend income. However the balance expenses of ₹ 2,14,08,065/- has been incurred and claimed by the assessee under the head administrative and other expenses. In the instant case the disallowance has been worked out to ₹ 60,53,495/- out of total administrative expenses of ₹ 2,14,08,065/-. Hence, the disallowance is not exceeding the total administrative expenses incurred by the assessee. Therefore the recent Notification issued by the CBDT No. SO 1949(E) dated 2.6.2016 and relied by the assessee where the disallowance was limited to the extent of total expenses will not be of any help.- Decided against assessee

Summary

Issues Involved:
1. Treatment of Long-Term Capital Loss as Speculation Loss.
2. Disallowance under Section 14A read with Rule 8D.

Detailed Analysis:

1. Treatment of Long-Term Capital Loss as Speculation Loss:
The primary issue in this case is whether the Long-Term Capital Loss (LTCL) of ?60,83,332/- incurred through Portfolio Management Services (PMS) should be treated as speculation loss under the Explanation to Section 73 of the Income Tax Act, 1961.

Assessee's Argument:
The assessee classified the transactions under the head "investment" in its balance sheet and argued that the transactions were made from surplus funds with the intention of earning income through investment, not trading. The assessee contended that similar transactions were treated as capital gains in the previous assessment year (AY 2009-10).

Assessing Officer's (AO) Stand:
The AO treated the transactions as business income, citing the volume, frequency, and quantum of transactions which suggested trading activity. The AO also noted that the assessee's principal business was mining, and therefore, the provisions of Explanation to Section 73 were applicable, treating the share transactions as speculation business.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, emphasizing the volume and frequency of transactions and the nature of the assessee's principal business, thereby classifying the transactions as speculation loss.

Tribunal's Analysis:
The Tribunal considered the following points:
- The assessee consistently classified such transactions under "investment" in its books.
- The assessee's treatment of similar transactions as capital gains in the previous year was accepted by the AO.
- CBDT Circular No. 6 of 2016, which states that if listed shares and securities held for more than 12 months are treated as capital gains by the assessee, the AO should not dispute this classification.
- The Delhi High Court's decision in Radials International vs. ACIT, which held that PMS agreements are mere agency agreements and do not indicate trading intent.

Tribunal's Conclusion:
The Tribunal concluded that the transactions should be treated as capital gains, not business income, reversing the order of the lower authorities. The assessee's ground was allowed.

2. Disallowance under Section 14A read with Rule 8D:
The second issue concerns the disallowance of ?60,53,495/- under Section 14A read with Rule 8D, relating to the expenditure incurred in earning exempt dividend income.

Assessee's Argument:
The assessee claimed that no borrowed funds were used for the investments and that there were sufficient funds available in the form of share capital and free reserves. The assessee also argued that no managerial remuneration was paid to its directors, and therefore, no expenses should be attributed to the exempt income.

Assessing Officer's (AO) Stand:
The AO observed that the assessee had substantial investments and must have incurred expenses to maintain these investments. The AO invoked Rule 8D to calculate the disallowance, as the assessee did not maintain separate accounts for exempt and non-exempt income.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, stating that dividend income is exempt in the hands of the assessee and the AO made the disallowance in accordance with the provisions of Section 14A read with Rule 8D.

Tribunal's Analysis:
The Tribunal noted:
- The AO's satisfaction for invoking Rule 8D was based on the assessee's failure to bifurcate expenses related to exempt and non-exempt income.
- The total administrative expenses claimed by the assessee were ?4,14,08,065/-, out of which ?2 crores were donations with no nexus to dividend income. The balance administrative expenses were ?2,14,08,065/-.
- The disallowance of ?60,53,495/- did not exceed the total administrative expenses.

Tribunal's Conclusion:
The Tribunal found the AO's application of Rule 8D justified and dismissed the assessee's ground. The disallowance under Section 14A was upheld.

Result:
The appeals for both AY 2010-11 and AY 2011-12 were partly allowed. The Tribunal reversed the lower authorities' decision on treating the capital gains as business income, but upheld the disallowance under Section 14A read with Rule 8D.