2020 (4) TMI 255 - AT - Income Tax

Correct head of income - Income from purchase of shares - LTCG OR business income - Whether the purchase of shares are shown under the head stock-in-trade or under the head investments? - HELD THAT - Since the department has not pointed out any material change in the facts of the present case, we have no reason to take a different view. Hence, respectfully following the decision of the coordinate Bench rendered in assessee s own case for the assessment year 2006-07 2014 (1) TMI 1599 - ITAT MUMBAI set aside the findings of the Ld. CIT(A) and allow this ground of appeal of the assessee. Accordingly, we direct the AO to treat the income of the assessee amounting to ₹ 74,05,599/- under the head income from short term capital gains. Disallowance u/s 14A read with rule 8D - assessee earned exempt income and not made any suo moto disallowance stating that it had not incurred any expenditure in relation to the earning of the said exempt income - HELD THAT - We notice that the Ld. CIT (A) has confirmed the disallowance amounting to ₹ 9,74,375/- computed by the AO against the exempt income of ₹ 4,21,042/-, which is contrary to the ratio laid down by the Hon ble Delhi High Court in the case of Joint Investments 2015 (3) TMI 155 - DELHI HIGH COURT as the disallowance confirmed by the Ld. CIT (A) is more than the exempt income earned by the assessee. The Hon ble Delhi High Court in the case of Joint Investments vs. CIT, has held that section 14A and Rule 8D cannot be interpreted to mean that the entire tax exempt income can be disallowed. In the present case, the assessee has earned exempt income of ₹ 4,21,042/- on which the AO made disallowance of ₹ 9,74,375/-. In view of the ratio laid down by the Hon ble Delhi High Court in the aforesaid case, the disallowance u/s 14A cannot exceed exempt income of the relevant year. Findings of the Ld.CIT (A) are contrary to the law laid down by the Hon ble Delhi High Court. Hence, following the ratio laid down by the Hon ble Delhi High Court in the aforesaid case, we set aside the findings of the Ld. CIT (A) and direct the AO to restrict the disallowance to the exempt income earned by the assessee during the relevant year.

Summary

Issues Involved:
1. Classification of income from sale of shares as 'Income from Business or Profession' versus 'Short Term Capital Gains'.
2. Disallowance under Section 14A of the Income Tax Act.
3. Charging of interest under Sections 234A, 234B, 234C, and 234D.
4. Initiation of penalty proceedings under Section 271(1)(c).
5. Addition under Section 2(22)(e) regarding deemed dividend.
6. Classification of interest income on Fixed Deposit and Savings Bank Interest as 'Income from Other Sources' versus 'Business Income'.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The assessee contended that the income of ?74,05,599 from the sale of shares should be treated as 'Short Term Capital Gains' rather than 'Income from Business or Profession'. The Tribunal referenced its previous decision in the assessee's case for the assessment year 2006-07, where it was determined that the assessee had shown all purchases under the investment portfolio, not as stock-in-trade. The Tribunal reiterated that if shares are held as investments, any gains should be treated as capital gains. The department failed to show any material change in facts, leading the Tribunal to direct the AO to treat the income as 'Short Term Capital Gains'.

2. Disallowance under Section 14A:
The AO disallowed ?9,74,375 under Section 14A read with Rule 8D, which was confirmed by the CIT(A). The assessee argued that the disallowance exceeded the exempt income earned (?4,21,042), contrary to the Delhi High Court ruling in Joint Investments vs. CIT. The Tribunal agreed, stating that disallowance under Section 14A cannot exceed the exempt income, and directed the AO to restrict the disallowance to the exempt income earned by the assessee.

3. Charging of Interest under Sections 234A, 234B, 234C, and 234D:
The assessee's grounds against the charging of interest under these sections were deemed premature and did not require adjudication at this stage.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings, asserting no concealment of income or filing of inaccurate particulars. This ground was also considered premature and did not require adjudication.

5. Addition under Section 2(22)(e) Regarding Deemed Dividend:
For the assessment year 2014-15, the assessee contested an addition of ?71,00,000 under Section 2(22)(e), arguing that only ?36,40,442 was received after repaying ?34,59,559. The Tribunal did not address this issue in detail as the assessee chose not to press this ground.

6. Classification of Interest Income:
The assessee also challenged the classification of ?3,24,673 as 'Income from Other Sources' instead of 'Business Income'. This ground was similarly not pressed by the assessee and was dismissed.

Conclusion:
The appeals for the assessment years 2012-13 and 2014-15 were partly allowed. The Tribunal directed the AO to treat the income from the sale of shares as 'Short Term Capital Gains' and to restrict the disallowance under Section 14A to the amount of exempt income earned. Other grounds were either dismissed as premature or not pressed by the assessee.