2018 (3) TMI 137 - AT - Income Tax

Disallowance u/s 14A - Held that - The assessee has earned dividend income of ₹ 13,51,268/-. There is an investment in equity shares of ₹ 3,80,35,247/-. There have been regular transactions of purchase and sale of shares and no specific expenditure has been disallowed suo moto in the return of income. It is beyond imagination that the assessee has not incurred any expenditure. Even through the method provided in Rule 8D read with rule 14A has been brought into effect from the assessment year 2008-09 but still, in our view, minor disallowance of ₹ 2,39,108/- is justified at the end of the Assessing Officer. We find no infirmity in the findings of the Commissioner of Income Tax (Appeals) confirming the impugned disallowances. - Decided against assessee Income from share trading - treatment as short term capital or business income - nature of income - Held that - In normal parlance if the assessee is indulged in some regular activity, which may be of providing service, earning salary, any business other than that of equity shares and along with this regular activity, if it occasionally deals in equity shares then such gain is normally shown ca capital gain but in the case of the assessee it has no other source of income and is engaged in trading of shares and securities consistently since long and major source of income is from trading in shares only and if such assessee subsequently opts to show transactions of purchase and sale of shares as capital gains and simultaneously also shows trading in shares then both the things cannot go together unless otherwise demarketed with proper records. No reason to interfere with the findings of the Commissioner of Income Tax (Appeals) treating as business income relying in the case of Wallfort Financial Services (2010 (6) TMI 510 - ITAT, MUMBAI) and Puran Associates Pvt. Ltd., (2012 (4) TMI 266 - ITAT DELHI ) - Decided against assessee

Summary

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

Issue-wise Detailed Analysis:

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

The assessee challenged the order of the Commissioner of Income Tax (Appeals) confirming the disallowance under Section 14A of the Act. The assessee argued that no expenses were booked directly related to the exempt income and no interest was debited to the profit and loss account. The Tribunal noted that the assessee earned dividend income of ?13,51,268 and had substantial investments in equity shares, amounting to ?3,80,35,247. Despite the absence of specific expenditure disallowed suo moto in the return of income, the Tribunal found it implausible that no expenditure was incurred. The Tribunal upheld the minor disallowance of ?2,39,108 made by the Assessing Officer, finding no infirmity in the Commissioner of Income Tax (Appeals)’s confirmation of the disallowance. Thus, this ground of the assessee was dismissed.

2. Treatment of Short-Term Capital Gain as Business Income:

The assessee contended that the Commissioner of Income Tax (Appeals) erred in enhancing the tax liability by treating ?41,40,403 as business income, which was initially accepted by the Assessing Officer as short-term capital gain. The Tribunal examined the facts, noting that the assessee had been engaged in trading and investing in shares for several years. The Tribunal observed that the assessee had shown purchase and sale of shares as business income up to the assessment year 2004-05 and had set off business losses of preceding years against the business income from trading of shares.

For the assessment year 2005-06, the assessee altered the treatment of transactions, showing major gains from the purchase and sale of shares as short-term and long-term capital gains, while also engaging in trading of shares. The Tribunal found that the assessee failed to provide separate D-mat accounts or records to distinguish between shares held as investments and those held as business assets. The Tribunal noted that the financial statements indicated borrowing of funds and a significant increase in the value of shares held.

The Tribunal referred to CBDT Circular No. 6/2016, which mandates consistency in treating shares as stock-in-trade or capital assets across assessment years. The Tribunal concluded that the assessee’s change in treatment of transactions for the assessment year 2005-06 was aimed at benefiting from lower tax rates and exemptions. Given the lack of separate records and the regular trading activity, the Tribunal upheld the Commissioner of Income Tax (Appeals)’s decision to treat ?76,30,666 as business income, relying on precedents from ITAT, Mumbai Bench in Wallfort Financial Services and Puran Associates Pvt. Ltd. Consequently, the assessee’s grounds on this issue were dismissed.

Conclusion:

The appeal of the assessee was dismissed in its entirety, with the Tribunal finding no reason to interfere with the Commissioner of Income Tax (Appeals)’s findings on both issues. The judgment was pronounced in open court on 28 February 2018.