2022 (4) TMI 968 - AT - Income Tax

Correct head of income - Treatment of the income from the sale of mutual funds and shares - capital income or income from business - principles of res judicata - HELD THAT - As in this case, we note that the revenue has consistently accepted the stand of the assessee that it is a trader of shares and mutual funds from AYs 2005-06 to 2007-08 and the AO deviated only in AY 2008-09 which has been reversed by the Ld. CIT(A) by passing the impugned order. Meanwhile, the AO had again treated the assessee s action as capital gain from investments for AY 2011-12 which was reversed by the Ld. CIT(A) and held it as business income which action of the CIT(A) has not been challenged by the AO, so the finding of Ld CIT(A) that assessee is a trader of of shares and mutual funds crystallises. Therefore, applying the principle of rule of consistency as held by the Hon ble Supreme Court in the case of Radhesoami Satsang 1991 (11) TMI 2 - SUPREME COURT since the fundamental facts permeating in the earlier years have not changed, and when certain position has been accepted by the department, then without any change in law, the consistent position/finding cannot be allowed to be changed - Decided in favour of assessee. Disallowance of expenditure by invoking section 14A read with Rule 8D(2)(ii) (iii) - HELD THAT - The ratio decidendi which emerges is that, it was qua the assessee s covered by the Board Circular No. 18 of 2015 viz., cooperative societies banks (to whom Section 80P was applicable), that the Hon ble Supreme Court NAWANSHAHAR CENTRAL CO-OPERATIVE BANK LTD. 2005 (8) TMI 28 - SC ORDER held that the provisions of disallowance u/s 14A cannot be applied to such assessee s. In the facts of the present case, the assessee is also a cooperative society which is engaged in the business of providing financial assistance to its members and is eligible for deduction u/s 80P of the Act. In our considered view therefore the above the judgment rendered in case of State Bank of Patiala 2017 (5) TMI 843 - PUNJAB AND HARYANA HIGH COURT and South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT is squarely applicable to the facts of the present case. We thus hold that the provisions of Section 14A cannot be applied to the assessee cooperative society and accordingly the AO is directed to delete the disallowance so made u/s 14A of the Act. Accordingly, the second and third grounds of appeal of the revenue stands dismissed and the ground in cross appeals of the assessee is allowed.

Summary

Issues Involved:
1. Whether the delay in filing the appeals by both the revenue and the assessee should be condoned.
2. Whether the income from the sale of shares and mutual funds should be treated as business income or capital gains.
3. Whether the disallowance of expenditure under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, was justified.

Detailed Analysis:

1. Condonation of Delay:
The appeals filed by the revenue were time-barred by 451 and 462 days, and those by the assessee were time-barred by 70 days. The delay was attributed to the Covid-19 pandemic. After hearing both sides and considering the reasons given, the delay was condoned, and all appeals were admitted for hearing.

2. Treatment of Income from Sale of Shares and Mutual Funds:
The revenue contested the CIT(A)'s decision to treat the income from the sale of shares and mutual funds as business income rather than capital gains. The CIT(A) had held that the assessee was a trader in shares and mutual funds, consistently treating the income derived from these transactions as business income from AY 2005-06 onwards. The CIT(A) relied on CBDT Circular No. 6/2016, which clarified the taxability of surplus on the sale of shares and securities. The CIT(A) also noted that the assessee's activities showed a clear pattern of regular trading in shares and mutual funds, indicative of business activity rather than investment. The principle of consistency was applied, as the revenue had accepted the assessee's treatment of income as business income in previous years. The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of maintaining consistency in tax treatment in the absence of any material change in facts or law.

3. Disallowance of Expenditure under Section 14A:
The revenue and the assessee both appealed against the CIT(A)'s decision regarding the disallowance of expenditure under Section 14A read with Rule 8D. The CIT(A) had upheld the applicability of Section 14A but directed the AO to recompute the disallowance by considering only the interest and expenses allocated for the purpose of computing business income. The Tribunal referred to the Supreme Court's judgment in Maxopp Investment Ltd. Vs. CIT and the case of State Bank of Patiala, where it was held that Section 14A applies to shares held as stock-in-trade. However, the Tribunal also noted that in the case of banking companies, the expenses incurred in connection with banking business were not disallowable under Section 14A. Given that the assessee was a cooperative society engaged in providing financial assistance to its members and eligible for deduction under Section 80P, the Tribunal held that Section 14A could not be applied. Consequently, the AO was directed to delete the disallowance made under Section 14A.

Conclusion:
In conclusion, the Tribunal dismissed all the appeals filed by the revenue and allowed all the appeals filed by the assessee. The income from the sale of shares and mutual funds was to be treated as business income, and the disallowance under Section 14A was not applicable to the assessee, a cooperative society. The order was pronounced in the open court on 18th April 2022.