2011 (9) TMI 1031 - AT - Income Tax

Tribunal: Capital gains not business income. Section 14A disallowance for reconsideration. Appeal partly allowed.

The Tribunal ruled in favor of the assessee, treating short-term and long-term capital gains as capital gains, not business income. The disallowance under ... Disallowance u/s 14A - Held that:- We find that this issue is now covered by the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] wherein it has been held that Rule 8-D is applicable for assessment year 2008-09 and onwards. We also find that Hon’ble Bombay High Court has further held that the assessing officer had to enforce the provisions of section 14A(1) and for that purpose, the assessing officer was duty bound to determine expenditure which has been incurred in relation to income which did not form part of total income under the Act by adopting a reasonable basis or method consistent with all relevant facts and circumstances. CIT (Appeals) was not justified in invoking the provisions of Rule 8-D for assessment year 2006-07, which is under consideration. However, since the disallowance under section 14A is to be made in respect of the expenditure incurred in relation to the exempted income, we feel it proper to set aside the matter to the file of the assessing officer with the directions to determine the disallowance of the expenditure relatable to the exempt income in the light of decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). The assessing officer is directed accordingly. Issues Involved:1. Classification of Short-term Capital Gains as Business Income2. Classification of Long-term Capital Gains as Business Income3. Disallowance under Section 14ADetailed Analysis:1. Classification of Short-term Capital Gains as Business IncomeThe assessee contended that the short-term capital gains on shares held for less than six months should be treated as capital gains, not business income. The CIT (Appeals) had categorized these gains as business income based on the holding period being less than six months. The Tribunal found that the assessee had treated the shares as investments in its books and received deliveries in a Demat account. The Tribunal held that merely selling shares within a short span does not change the character of capital gains to business income. The Tribunal cited the decisions in CIT Vs. Ess Jay Enterprises P. Ltd. and CIT Vs. Gulmohar Finance Ltd. to support the view that shares held as investments should be treated as capital gains. Thus, the Tribunal disagreed with the CIT (Appeals) and ruled that the short-term capital gains should be treated as capital gains, not business income.2. Classification of Long-term Capital Gains as Business IncomeThe Revenue appealed against the CIT (Appeals)'s decision to treat the income from shares held for more than six months as capital gains. The CIT (Appeals) had allowed the claim of the assessee, noting that the shares were held for a longer period with the intention of earning dividend income. The Tribunal upheld this view, stating that the shares were shown as investments and the long-term capital gains were rightly treated as such. The Tribunal emphasized that the assessee had made long-term investments and earned dividends, thus supporting the classification as capital gains.3. Disallowance under Section 14AThe assessee raised an additional ground regarding the disallowance under Section 14A. The CIT (Appeals) had directed the AO to compute the disallowance as per Rule 8D, following the ITAT Special Bench decision in ITO Vs. Daga Capital Management P. Ltd. The Tribunal noted that Rule 8D is applicable from the assessment year 2008-09 onwards, as held by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT. Therefore, the Tribunal found that the CIT (Appeals) was not justified in applying Rule 8D for the assessment year 2006-07. The Tribunal set aside the matter to the AO to determine the disallowance of the expenditure related to exempt income, consistent with the decision in Godrej & Boyce Mfg. Co. Ltd.Conclusion:The Tribunal ruled in favor of the assessee regarding the classification of short-term capital gains and long-term capital gains, treating them as capital gains. The Tribunal also set aside the disallowance under Section 14A for reconsideration by the AO. The appeal by the assessee was partly allowed for statistical purposes, and the appeal by the Revenue was dismissed. The order was pronounced on 30th September 2011.