2019 (3) TMI 1200 - AT - Income Tax

Addition u/s 14A - suo moto disallowance by assessee - correctness of the claim of the assessee in respect of such an expenditure in relation to the income which does not form part of the total income under the Act - HELD THAT - Before jumping to the conclusion that the disallowance has to be worked out in accordance with the provisions of Rule 8D(2) of the Rules, AO did not refer to the correctness or otherwise of the disallowance made by the assessee herself. Requirement of law under Rule 14A(2) is that it is only if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim in respect of such an expenditure in relation to the income which does not form part of the total income under the Act then only the AO shall determine the amount of expenditure incurred in accordance with the method prescribed under Rule 8D. Rule 8D(1)(a) also reflects this mandate of law. When we apply the provisions of Section 14A read with Rule 8D(1)(a) in the light of the observations in the case of Godrej & Boyce Manufacturing Co. Ltd 2017 (5) TMI 403 - SUPREME COURT OF INDIA to the facts of the case, irresistible conclusion is that any addition made in violation of the above, cannot be sustained. We, therefore, while respectfully following the above line of decision allow grounds of assessee s appeal and direct the learned AO to delete the same. Income from trading of securities - Correct head of income - income from short term and long term capital gain OR income from business - in respect of all the three years, CIT(A) had taken a consistent view that this receipt must be treated not as income from business but has to be treated as income from short term capital gain and long term capital gain - rule of consistency - HELD THAT - A coordinate bench of this tribunal in the light of the decision of CIT vs Avinash Jain 2013 (1) TMI 315 - DELHI HIGH COURT and CIT vs CNB Finwiz Ltd. 2014 (8) TMI 645 - DELHI HIGH COURT held that the law on this aspect is fairly settled and in the facts and circumstances of the case, learned CIT(A) was right in directing the AO to treat the impugned receipt as income from capital gains and not as business income. In view of the consistent view on this aspect for all the Asstt. Years 2010-11, 2012-13 and 2013-14 and a coordinate bench confirming such a view for the AY 2010-11 whereas Revenue accepting the same for AY 2012-13, we are of the considered opinion that in the absence of any change in the fundamental facts permeating these three years, it would not be appropriate to allow the position to be changed in a subsequent year. We find our opinion fortified by the decision of the Hon ble Supreme Court in the case of Radhasoami Satsang vs CIT 1991 (11) TMI 2 - SUPREME COURT - direct the learned AO to treat this particular receipt as income from short term and long term capital gain but not as income from business. - decided against revenue

Summary

Issues Involved:
1. Classification of income as "Income from Business or Profession" versus "Capital Gains".
2. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.

Detailed Analysis:

1. Classification of Income:
The primary issue revolves around whether the income from the sale and purchase of securities should be classified as "Income from Business or Profession" or "Capital Gains". The Assessing Officer (AO) observed that the assessee was deeply involved in trading securities and concluded that the income should be classified under "Income from Business or Profession". The AO supported this by referring to the volume and frequency of transactions and the assessee's organized approach to trading, suggesting a business activity rather than mere investment.

However, the Commissioner of Income-tax (Appeals) [CIT(A)] found that the facts of the case were consistent with previous years, where similar income was treated as "Capital Gains". The CIT(A) followed the precedent set in the assessee's own case for the Assessment Year (AY) 2012-13, directing that the income be assessed under "Capital Gains" rather than business income. This decision was consistent with previous tribunal rulings for other assessment years (AY 2010-11 and AY 2012-13), where the income was similarly classified as "Capital Gains".

The tribunal upheld the CIT(A)'s decision, noting the consistency in the assessee's treatment of income and the lack of any fundamental change in the facts. The tribunal referenced the Hon'ble Supreme Court's decision in Radhasoami Satsang vs CIT, emphasizing the importance of consistency in judicial decisions when facts remain unchanged.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The AO disallowed ?34,21,181/- under Section 14A, stating that the assessee's self-disallowance of ?3,795/- was insufficient. The AO did not record any dissatisfaction with the assessee’s computation before applying Rule 8D.

The CIT(A) upheld the AO's disallowance, but the assessee contested this, arguing that the AO failed to record the necessary satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The tribunal agreed with the assessee, citing the Hon'ble Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd., which mandates that the AO must be dissatisfied with the assessee's claim before applying Rule 8D.

The tribunal concluded that the AO's failure to record such satisfaction rendered the disallowance unsustainable. Consequently, the tribunal directed the deletion of the disallowance made under Section 14A.

Conclusion:
The tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and dismissed the Revenue's appeal concerning the classification of income. The tribunal's decision was pronounced in March 2019.