2017 (8) TMI 76 - AT - Income Tax

Sale of shares - business income or capital gain - Held that - We find that the assessee has been investing in shares for the last more than ten years. He has always shown the shares purchased as Investment in the balance sheet for all the years and valued the same at cost. The gains arising from sale of shares was also classified by the assessee as capital gains only. The assessee has earned dividend of ₹ 28,37,719/- during the financial year 2006-07 relevant to the impugned assessment year. We find that the Co-ordinate Bench of the Tribunal in the case of the assessee for the A.Y. 2004-05, A.Y. 2008-09 and A.Y. 2009-10 have held the share transactions as capital gains and not as income from business. Addition u/s 14A read with rule 8D - Held that - We find that the AO has worked out the disallowance u/s 14A r.w.r. 8D. The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT ), it has been held that Rule 8 D is not retrospective. The Hon ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd 2014 (8) TMI 457 - BOMBAY HIGH COURT has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income.Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Disallowance u/s 94(7) out of business loss claimed by the assessee - whether the loss incurred on sale of securities to the extent of dividend income earned is not allowable, which was confirmed by the learned CIT(A) - Held that - There is merit in the contentions of the learned counsel of the assessee that in case, loss for scrips held for 6 months is treated as STCL, then the disallowance u/s 94(7) must also be made out of STCL and not out of business loss. In view of the above, the order of the learned CIT(A) on the above issue is set aside and the AO is directed to restrict the disallowance to ₹ 1,56,177/- under the business head and adjust the balance of ₹ 37,560/- against STCL under capital gains head. Disallowance of interest expenses - Held that - We find that (i) 99.46% of funds is interest free funds (ii) 0.32% of funds is interest free borrowed funds and (iii) 0.22% is interest bearing funds bearing in a common pool of funds. In the case of Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ), it is held that if there be interest-free funds available to an assessee to meet its investments and at the same time the assessee has raised a loan, it can be presumed that the investments were from the interest-free 9 funds available. We follow the ratio laid down in the above judgement and delete the disallowance of ₹ 40,500/- made by the AO

Summary

Issues:
1. Treatment of profit on sale of shares as Business Income vs. Short Term Capital Gain
2. Disallowance u/s 14A of the Act
3. Disallowance u/s 94(7) of the Act
4. Disallowance of interest expenses

1. Treatment of profit on sale of shares as Business Income vs. Short Term Capital Gain:
The appellant contested the order treating profit on sale of shares as Business Income instead of Short Term Capital Gain. The appellant argued that the treatment was incorrect based on facts and law. The appellant cited previous judgments supporting capital gains treatment for share transactions. The Tribunal noted the appellant's consistent investment approach and dividend income history, concluding that the gains should be taxed as capital gains, following past decisions. Therefore, the 1st ground of appeal was allowed.

2. Disallowance u/s 14A of the Act:
The AO disallowed a sum under section 14A concerning exempt income against expenses. The appellant challenged this disallowance, citing the non-retrospective nature of Rule 8D and previous ITAT directions in a similar case. The Tribunal agreed that Rule 8D is not retrospective and directed a 2% disallowance of total exempt income, partially allowing the 2nd ground of appeal.

3. Disallowance u/s 94(7) of the Act:
The AO disallowed a sum under section 94(7) regarding business loss and dividend income. The appellant argued that if treated as Short Term Capital Loss, the disallowance should be against that category. The Tribunal agreed with the appellant's position, directing the disallowance under the business head and adjusting the balance against STCL, partially allowing the 3rd ground of appeal.

4. Disallowance of interest expenses:
The AO disallowed interest expenses due to a lack of nexus with the business. The appellant contended that most funds were interest-free, and reliance was placed on a relevant judgment. The Tribunal noted the majority of interest-free funds and allowed the appeal, deleting the disallowance of interest expenses. Consequently, the 4th ground of appeal was allowed partially.

In conclusion, the Tribunal partly allowed the appeal based on the above analysis of the issues raised by the appellant regarding the treatment of income, disallowances, and interest expenses.