2012 (11) TMI 278 - AT - Income Tax

Court revises disallowance percentage in tax case, upholds long-term capital gain classification.

The court partially allowed ITA No. 3411/M/2009, directing the Assessing Officer to compute the disallowance at 2% of exempt income instead of the initial ... Expenses in relation to exempt Income u/s 14A - Assessee submits that it had not incurred any direct expenditure. Assessee had earned dividend income, therefore, provision of sec. 14A is squarely applicable - CIT (A) is not correct in by directing the AO to recalculate the disallowance by following Rule 8D - AO is directed to compute the disallowance @ 2% of the exempt income instead of 04.6% which should meet the ends of justice. Business Income vs. Capital Gain – Following the decision of court in case of [C.I.T. Versus GOPAL PUROHIT 2010 (11) TMI 222 - SUPREME COURT OF INDIA] held that:- Delivery based transactions should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain,depending upon the period of the holding. – Further, the principle of res -judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee - assessee’s investments leading to earning of profit in hand could not be termed as business income - issue is decided in assessee’s favour. Issues involved:1. Applicability of sec. 14A of the Act r.w. Rule 8D for Assessment Year 2005-06.2. Classification of profits earned on sale of shares as 'capital gains' or business income.Issue 1 - Applicability of sec. 14A and Rule 8D:The assessee, involved in investments and share dealings, declared total income with exempt dividend income. The Assessing Officer (AO) disallowed expenses related to the exempt income under sec. 14A. The CIT (A) directed re-calculation using Rule 8D, but the ITAT held that Rule 8D cannot apply for the year 2005-06. Referring to the Godrej Boyce case, ITAT directed the AO to compute disallowance at 2% of exempt income, differing from the initial 4.06%.Issue 2 - Classification of profits on sale of shares:The assessee claimed profits from share trading as capital gains, both long-term and short-term. The AO treated the profits as business income due to lack of evidence supporting investment intent. Despite separate D-mat A/cs and resolutions for investments, the AO and CIT (A) held the income as business income, citing large-scale trading and profit motive. The ITAT noted the consistency in treating transactions as investments, upheld the intention to invest and wait for returns, and ruled in favor of the assessee, classifying the profits as capital gains.Connected Appeal - ITA No. 6472/M/2009 (AY: 2006-07):The same issue of share investments being treated as business income was raised. The ITAT, aligning with the decision in the previous appeal, upheld the classification of the entire amount as long-term capital gain, rejecting the Department's classification as business income due to the absence of short-term capital gains. Consequently, this appeal was allowed.In conclusion, ITA No. 3411/M/2009 was partly allowed, and ITA No. 6472/M/2009 was allowed, emphasizing the distinction between capital gains and business income and the application of relevant provisions for the assessment years in question.