2011 (2) TMI 1484 - AT - Income Tax

Tribunal allows assessee's cross-objection, directs reassessment under Section 14A, classifies share income as capital gains.

The Tribunal dismissed the Department's appeal and allowed the assessee's cross-objection, directing the AO to reassess the disallowance under Section 14A ... - Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.2. Classification of income from share transactions as either business income or capital gains.Issue-Wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962:The assessee contested the disallowance of Rs. 6,37,288 under Section 14A read with Rule 8D, arguing that Rule 8D was effective from the assessment year 2008-09 and not applicable retrospectively. The assessee claimed that investments yielding exempt income were funded by non-borrowed funds and that there was no nexus between any expenditure or interest and the exempt income. The CIT(A) had directed the AO to recompute the disallowance, considering only agricultural land as exempted income assets and including liabilities deducted in the balance sheet.The Tribunal observed that the AO applied Rule 8D, which is applicable prospectively from the assessment year 2008-09, while the assessment year in question was 2006-07. Following the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd., which held that Rule 8D is not retrospective, the Tribunal remanded the issue back to the AO for fresh adjudication, directing the AO to apply a reasonable method in line with the Bombay High Court's guidelines.2. Classification of Income from Share Transactions:The Department appealed against the CIT(A)'s decision to classify the income from share transactions as capital gains rather than business income. The AO had treated the income as business income based on the magnitude and frequency of transactions, proportion of dividend to profit, deployment of professional companies, and the object clause in the Memorandum of Association.The CIT(A) found that the assessee maintained its portfolio as investments for several years, the period of holding was sufficiently long, and the frequency of transactions was not regular. The AO had accepted short-term capital gains but treated long-term gains differently. The CIT(A) concluded that the shares were held as investments and not as trading assets, directing the AO to assess the income as capital gains.The Tribunal upheld the CIT(A)'s decision, noting that the assessee's investments were consistently shown as such in the balance sheet, and the AO's selective treatment of transactions was not justified. The Tribunal emphasized that the department had accepted the investments in earlier years, and there was no basis to change the classification for the year under consideration. Citing the Madras High Court's ruling in N.S.S. Investments P. Ltd., the Tribunal affirmed that the income should be classified as capital gains.Conclusion:The Tribunal dismissed the Department's appeal and allowed the assessee's cross-objection for statistical purposes, directing the AO to reassess the disallowance under Section 14A without applying Rule 8D retrospectively and to classify the income from share transactions as capital gains.