2020 (6) TMI 75 - AT - Income Tax

Characterisation of Income - capital gain or business income - activity of purchase on sale of the shares - HELD THAT - In view of the consistent finding of the Tribunal since assessment year 2008-09, respectfully following the finding of the Tribunal for assessment year 2008-09 to 2012-13 2018 (3) TMI 1409 - ITAT DELHI we set aside the order of the lower authorities and hold the activity of purchase and sale of shares in question as investment activity to be assessed under the head capital gain. Disallowance under section 14A read with rule 8D - expenses on account of the income on which no activity was done in the previous year, was not accepted by the Assessing Officer and the explanation of the assessee that no expenses were incurred toward earning of dividend income shares of Dabur India Ltd, which was a strategic investment, was also rejected - First contention of the assessee that no expenses were been disallowed corresponding to the strategic investment made in the shares of the Dabur India Ltd as promoter. - HELD THAT - In this regard, the Hon ble Supreme Court in the case of Maxopp Investment Ltd Vs CIT 2018 (3) TMI 805 - SUPREME COURT where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed - contention of the assessee investment made for acquiring controlling interest in Dabur India Ltd should not be subject to disallowance under section 14A is rejected. Whether no dissatisfaction was recorded by the AO on the claim of the assessee of expenses toward earning exempt income? - We agree with the finding of the Ld. CIT(A), that when the assessee itself as computed the disallowance in terms of rule 8D and thereafter reducing the expenses corresponding to earning dividend income from shares of M/s Dabur India Ltd. was not justified. The Assessing Officer in para 4.3 to 4.5 of the assessment order has duly rejected the action of the assessee of reducing the expenses related to earning of the dividend income from the shares of M/s. Dabur India Ltd. Accordingly, we reject the contention of the assessee and upheld the finding of the Learned CIT(A) on the issue in dispute. The ground No. 2 of the appeal of the assessee is accordingly dismissed. Disallowance of business expenditure - HELD THAT - It is undisputed that 10 percentile disallowance was agreed by the Authorized Representative of the assessee before the AO and therefore the AO did not identify the individual expenditure not related to the business purpose. In view of the admission of the Authorized Representative of the assessee for disallowance of 10% of the expenses as incurred for non-business purpose, we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and accordingly uphold the same. The ground No.3 of the appeal of the assessee is accordingly dismissed.

Summary

Issues Involved:
1. Classification of income from capital gains as business income.
2. Disallowance of expenses under Section 14A read with Rule 8D.
3. Disallowance of business expenses.

Detailed Analysis:

1. Classification of Income from Capital Gains as Business Income:
Facts:
The assessee claimed long-term capital gain of ?1,51,75,238/-. The Assessing Officer (AO) treated this as business income based on the consistent stand of the Income Tax Department in previous years, supported by Tribunal decisions for assessment years 2005-06 to 2007-08.

Arguments:
- The assessee argued that the fixed maturity plans are not trading stock and should be taxed at 20% as capital gains.
- The AO and CIT(A) treated the gains as business income based on past assessments and Tribunal rulings.

Tribunal's Findings:
- The Tribunal acknowledged that in previous years, similar transactions were treated as business income.
- However, for assessment years 2008-09 to 2012-13, the Tribunal had held such activities as investment activities, assessable under capital gains.
- The Tribunal referred to CBDT Circular No. 6/2016 and subsequent judicial precedents supporting the treatment of long-term investments as capital gains if held for more than 12 months.

Conclusion:
The Tribunal set aside the lower authorities' orders and held that the activity of purchase and sale of shares should be assessed under the head capital gain.

2. Disallowance of Expenses under Section 14A read with Rule 8D:
Facts:
The assessee disclosed income of ?28.3 crores and made a disallowance of ?10,82,334/- under Section 14A. The AO disallowed an additional ?53,16,568/-.

Arguments:
- The assessee contended that no expenses were incurred for earning dividend income from shares of Dabur India Ltd., which was a strategic investment.
- The AO and CIT(A) rejected this argument, stating that Rule 8D(2)(iii) does not allow for such exclusions.

Tribunal's Findings:
- The Tribunal referred to the Supreme Court decision in Maxopp Investment Ltd. Vs CIT, which held that the dominant purpose of investment is not relevant for Section 14A.
- The Tribunal upheld the CIT(A)'s decision that the disallowance should be as per Rule 8D(2)(iii) without any exclusions.

Conclusion:
The Tribunal dismissed the assessee's appeal on this ground, confirming the disallowance of ?53,16,568/-.

3. Disallowance of Business Expenses:
Facts:
The AO disallowed ?15,48,318/- out of business promotion expenses of ?1,54,83,180/- based on the assessee's admission that certain expenses were not incurred for business purposes.

Arguments:
- The assessee argued that the disallowance was made on an ad-hoc basis without identifying specific non-business expenses.
- The AO and CIT(A) noted that the disallowance was on an agreed basis during assessment proceedings.

Tribunal's Findings:
- The Tribunal observed that the disallowance was agreed upon by the assessee's representative during assessment.
- The Tribunal cited judicial precedents that an order based on agreement cannot be contested in appeal.

Conclusion:
The Tribunal upheld the disallowance of ?15,48,318/-, dismissing the assessee's appeal on this ground.

Final Judgment:
The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the classification of capital gains but against the assessee on the disallowance of expenses under Section 14A and business expenses.