2018 (1) TMI 395 - AT - Income Tax

Treating the loss from the transactions in mutual funds - busniss or capital loss - Held that - After having recorded these findings on the basis of submissions made by the assessee, the Ld. CIT(A) held that the transactions in shares and mutual funds could not be split up to give different treatment for the purpose of computing the income of the assessee since both the activities were one and the same and were carried on in an organized manner to earn profit. He accordingly directed the A.O. to treat the loss incurred by the assessee in the transactions of mutual funds as business loss and set off the same against the profits of the assessese from share trading. At the time of hearing before the Tribunal, DR has not been able to raise any material contention or bring any relevant material to rebut or controvert the findings recorded by the Ld. CIT(A) while giving relief to the assessee on this issue. Therefore, find no justifiable reason to interfere with the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. As regards the application of provisions of section 94(7), the Ld. CIT(A) has held that the said provisions are not applicable in the case of the assessee as it involved investment in dividend reinvestment plan. Moreover, as submitted by the learned counsel for the assessee at the time of hearing, the assessee had not received any dividend from the relevant mutual funds. Thus as in agreement with the Ld. CIT(A) that provisions of 94(7) are not applicable in the case of the assessee. As held by the Ld. CIT(A), the provisions of section 94(8) were relevant and since the assessee had not continued to hold all or any of the additional unit allotted on the reinvestment of the dividend, the same was also not applicable. Therefore, uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 1 and 2 of the revenue s appeal. Addition u/s 14A - Held that - It is observed that this issue is squarely covered in favour of the assessee by the decision of the Hon ble Kolkata High Court in the case of CIT vs G.K.K. Capital Markets (P) Ltd. (2017 (2) TMI 628 - CALCUTTA HIGH COURT) wherein it was held that no disallowance under section 14A can be made on account of expenditure incurred in relation to the investment made by the assessee in shares held as stock in trade. - Decided against revenue

Summary

Issues:
1. Treatment of loss from mutual fund transactions as capital loss.
2. Applicability of section 94(7) and 94(8) of the Income Tax Act, 1961.
3. Treatment of transactions in shares and mutual funds for computing income.
4. Disallowance under section 14A for exempt income earned from shares held as stock in trade.

Issue 1: Treatment of Loss from Mutual Fund Transactions as Capital Loss
The first issue revolved around the treatment of a loss of ?23,40,887 from mutual fund transactions as a capital loss by the Assessing Officer (A.O.). The A.O. considered the loss as a result of dividend stripping, invoking section 94(7) of the Income Tax Act, 1961. However, the Commissioner of Income Tax (Appeals) [CIT(A)] ruled in favor of the assessee, stating that section 94(7) was not applicable as the mutual funds were of a dividend reinvestment plan. The CIT(A) directed the A.O. to set off the entire loss of mutual funds against the profits from share trading, treating both activities as part of the same business. The Tribunal upheld the CIT(A)'s decision, emphasizing that the activities were interlinked and conducted with the intention of earning profit.

Issue 2: Applicability of Section 94(7) and 94(8) of the Income Tax Act, 1961
Regarding the applicability of section 94(7) and 94(8) of the Income Tax Act, 1961, the CIT(A) determined that section 94(7) did not apply to the assessee's case due to the nature of the mutual funds being of a dividend reinvestment plan. The CIT(A) further noted that the provisions of section 94(8) were also not met as the assessee did not continue to hold the additional units allotted on reinvestment of the dividend. Consequently, the Tribunal upheld the CIT(A)'s decision, stating that section 94(7) was not applicable, and section 94(8) did not apply due to the lack of continued holding of additional units.

Issue 3: Treatment of Transactions in Shares and Mutual Funds for Computing Income
The issue of whether transactions in shares and mutual funds could be treated differently for computing income was addressed. The CIT(A) ruled that both activities were interconnected and conducted in an organized manner to earn profit, thus constituting a single business. The Tribunal concurred with this assessment, affirming that the loss from mutual funds should be treated as a business loss and set off against profits from share trading, as both activities were part of the same business venture.

Issue 4: Disallowance under Section 14A for Exempt Income Earned from Shares Held as Stock in Trade
The final issue involved the disallowance made by the A.O. under section 14A concerning exempt income earned from shares held as stock in trade. The A.O. disallowed expenses under Rule 8D, leading to a disallowance of ?29,69,773. However, the CIT(A) deleted this disallowance, citing judicial pronouncements and holding that no disallowance under section 14A was necessary for exempt income earned from stock in trade. The Tribunal upheld the CIT(A)'s decision, referencing a Kolkata High Court ruling and dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues raised, including the treatment of losses from mutual fund transactions, the applicability of relevant sections of the Income Tax Act, the treatment of transactions in shares and mutual funds, and the disallowance under section 14A for exempt income earned from shares held as stock in trade.