2018 (8) TMI 1636 - AT - Income Tax

Profit earned on sale of shares - short term capital gain or business income - nature of income - frequency in transaction - Held that - Assessee has purchased and sold scrips multiple times, on various dates alleged to have been held as investment within small duration. The magnitude of purchases on each date has been very large in respect of all these shares. Thus in our considered opinion frequency and volume of purchase and sale of shares shows, intention of assessee was to generate income through trade, rather than invest in them. Thus we do not agree with view of Ld. CIT (A) in considering income generated from sale of these shares as capital gain instead of income from business . - decided in favour of revenue Disallowance under section 14A - Held that - Admittedly, assessee has not computed any disallowance under section 14 A towards earning of exempt income. We therefore direct Ld. AO to recompute the disallowance under section 14 A (1) read with Rule 8D, on the basis of the decision of Hon ble Supreme Court in the case of Maxopp investments Ltd vs CIT 2018 (3) TMI 805 - SUPREME COURT OF INDIA

Summary

Issues Involved:
1. Classification of income from the sale of shares as 'short term capital gain' or 'business income'.
2. Disallowance under section 14A of the Income Tax Act.
3. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue was whether the profit of ?35,14,66,127/- earned by the assessee on the sale of shares should be classified as 'short term capital gain' or 'business income'. The Assessing Officer (AO) had treated this income as 'business income' based on several observations:
- The assessee did not maintain separate books of accounts for investments and regular business.
- The turnover of shares was substantial, indicating trading activity.
- The frequent trading of shares suggested an intention to earn profits rather than hold shares for dividends.
- In the preceding assessment year, the assessee had treated similar income as 'business income'.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee's plea to treat the income as 'capital gains'. However, the Revenue appealed, arguing that the CIT(A) had failed to address the AO's arguments and had passed a non-speaking order. The Revenue emphasized the large volume and frequency of transactions, which indicated a trading intent.

The Tribunal reviewed the facts and found that the assessee's conduct, such as the high frequency and volume of transactions and the lack of separate accounts for investments, indicated an intention to trade rather than invest. The Tribunal relied on various judicial precedents, including the Supreme Court's decision in CIT v. Associated Industrial Development Co. (P.) Ltd., which emphasized the importance of the assessee's intention and conduct. Consequently, the Tribunal upheld the AO's decision to treat the income as 'business income'.

2. Disallowance under Section 14A:
The second issue was the disallowance of ?7,60,000/- under section 14A of the Income Tax Act. The assessee argued that it had received exempt income of ?16,300/- as dividends from mutual funds and had not incurred any expenditure to earn this income. The AO, however, computed the disallowance based on 0.5% of the average value of investments.

The Tribunal directed the AO to recompute the disallowance under section 14A in light of the Supreme Court's decision in Maxopp Investments Ltd. vs CIT, which provides guidance on the computation of such disallowances.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The third issue was related to the initiation of penalty proceedings under section 271(1)(c) for alleged concealment of income or furnishing inaccurate particulars. The Tribunal noted that this ground was premature at this stage and did not require adjudication.

Conclusion:
The Tribunal allowed the Revenue's appeal, treating the income from the sale of shares as 'business income'. The assessee's appeal was allowed for statistical purposes, directing the AO to recompute the disallowance under section 14A. The issue of penalty proceedings was deemed premature and was not adjudicated.