2010 (10) TMI 784 - AT - Income Tax

Tribunal rules in favor of assessee on capital gains classification and disallowance under Income Tax Act

The Tribunal upheld the classification of profit from the sale of shares as long-term capital gains, rejecting the revenue's argument that it should be ... Business income Vs. Capital gain - Assessee had shown income under the head 'short term capital gains' amounting to Rs.7,112/- and long term capital loss of Rs.11,15,745/- which has been carried forward for adjustment against future long term capital gains - e neither the Assessing Officer nor the Ld. Departmental Representative of the revenue could bring anything on record to show that the assessee was engaged in the business of purchase and sale of shares on regular basis and hence merely because as per the object clause of the Memorandum of Association, the assessee can deal in shares, it cannot be held that any transaction by the assessee for purchase of shares or for sale of shares, purchased in earlier years is a business transaction. Regarding disallowance u/s 14A - Rule 8D - Rule 8D was not applicable for the concerned year. For that proposition he relied upon the Hon'ble Mumbai High Court decision in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT). In this case it was held that Rule 8 D has been notified on 24.3.2008 and will be applicable only from Assessment year 2008-09. Issues Involved:1. Classification of profit from the sale of shares as 'long term capital gain' versus 'income from business'.2. Enhancement of disallowance under section 14A of the Income Tax Act.Detailed Analysis:1. Classification of Profit from Sale of Shares:The primary issue raised by the revenue was whether the Ld. Commissioner of Income Tax (Appeals) erred in directing the Assessing Officer to compute the profit of Rs.61,04,691/- on the sale of shares as 'long term capital gain' rather than 'income from business'.The Assessing Officer noted that the assessee was engaged in the business of investment and finance, and had shown income under 'short term capital gains' and 'long term capital loss'. The Assessing Officer argued that the company's Memorandum of Association indicated a profit motive in dealing with shares, suggesting the nature of the transactions was an adventure in the nature of trade. Consequently, the Assessing Officer treated the transactions as business income and denied the benefit of indexation of the cost of acquisition of the shares sold.Upon appeal, the Ld. Commissioner of Income Tax (Appeals) referred to an earlier decision in the assessee's own case for A.Y. 2003-04, which concluded that the appellant company was not engaged in trading shares during the year under consideration. The Commissioner noted that the shares of HDFC Bank were held for over seven years and were classified as long-term investments in the audited balance sheets. The Commissioner found no sufficient merit in the Assessing Officer's action, emphasizing that the intention was for long-term investment, as evidenced by the resolution passed by the Board of Directors.The Tribunal upheld the order of the Ld. Commissioner of Income Tax (Appeals), noting that the facts of the present case were identical to those of previous years. The Tribunal found no reason to interfere with the Commissioner's order, confirming that the profit on the sale of shares should be treated as long-term capital gains.2. Enhancement of Disallowance under Section 14A:The second issue in the cross-objection by the assessee was the enhancement of disallowance under section 14A of the Income Tax Act. The Assessing Officer had made an ad-hoc disallowance of Rs.25,000/- towards expenses attributable to exempt income.Upon appeal, the Ld. Commissioner of Income Tax (Appeals) referred to the ITAT decision in the case of M/s. Daga Capital Management (P) Ltd. and directed the assessee to work out the disallowance as per Rule 8D, which amounted to Rs.1,36,838/-. Consequently, the Commissioner directed the Assessing Officer to enhance the disallowance accordingly.The assessee contended that Rule 8D was not applicable for the concerned year, relying on the Hon'ble Mumbai High Court decision in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT, which held that Rule 8D would be applicable only from Assessment Year 2008-09.The Tribunal agreed with the assessee's contention and restored the disallowance made by the Assessing Officer, setting aside the order of the Ld. Commissioner of Income Tax (Appeals) enhancing the disallowance.Conclusion:The Tribunal dismissed the revenue's appeal and partly allowed the cross-objection filed by the assessee. The profit from the sale of shares was confirmed to be treated as long-term capital gains, and the enhancement of disallowance under section 14A was set aside. The order was pronounced in the open court on 20.10.2010.