2018 (8) TMI 1417 - AT - Income Tax

Nature of income - purchased and sale of equity, mutual funds and bonds - capital gains or business income - Held that - The order of CIT (A) is corrected, wherein he has directed to treat the impugned income as income from capital gains and not as business income. Since the impugned income is to be treated as income from capital gains, the benefit of indexation will also be allowable to the assessee. - Decided against the revenue. Disallowance u/s 14A - exempted income - Held that - the disallowance could not have been made in absence of proper recording of satisfaction by the Assessing Officer. We have no other option but to direct the deletion of this disallowance. - Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Classification of income as 'Capital Gains' or 'Business Income'.
3. Allowance of indexation benefit.

Detailed Analysis:

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

The assessee contested the disallowance of ?8,14,313/- under Section 14A of the Income Tax Act, which was sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the Assessing Officer (AO) did not record proper satisfaction as required by law for making the disallowance. The AO had clubbed dividend income from personal investments with business investments, which the assessee claimed incurred no expenditure.

The Income Tax Appellate Tribunal (ITAT) noted that the AO failed to record why he was not satisfied with the assessee's claim that no expenditure was incurred for earning the dividend income from personal investments. The ITAT referenced the Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, which mandates that the AO must record satisfaction regarding the correctness of the assessee's claim before making a disallowance under Section 14A. Consequently, the ITAT directed the deletion of the disallowance, allowing the assessee's appeal.

2. Classification of Income as 'Capital Gains' or 'Business Income':

The department challenged the CIT(A)'s decision to classify the income of ?65,38,895/- as 'Capital Gains' instead of 'Business Income'. The AO had treated this income as business income, arguing that the assessee was engaged in the business of trading securities and showing some income under 'Capital Gains' was a ploy to benefit from lower tax rates.

The ITAT upheld the CIT(A)'s decision, referencing the Delhi High Court's judgments in CIT vs. Avinash Jain and CIT vs. CNB Finwiz Ltd., which supported the view that a taxpayer could maintain separate portfolios for investment and trading. The ITAT noted that the assessee had consistently treated similar income as 'Capital Gains' in previous and subsequent assessment years, and there was no reason to deviate from this established practice. Thus, the ITAT dismissed the department's appeal.

3. Allowance of Indexation Benefit:

The department also contested the CIT(A)'s decision to allow the benefit of indexation for the income classified as 'Capital Gains'. The AO had denied this benefit, treating the income as business income.

The ITAT, having upheld the classification of the income as 'Capital Gains', confirmed that the benefit of indexation was rightly allowed by the CIT(A). The ITAT emphasized the importance of consistency, noting that the assessee had been allowed indexation benefits in previous and subsequent years without any adverse findings.

Conclusion:

The ITAT allowed the assessee's appeal regarding the disallowance under Section 14A and dismissed the department's appeal on the classification of income and the allowance of indexation benefit. The final decision resulted in the assessee's appeal being allowed and the department's appeal being dismissed.