2014 (9) TMI 519 - AT - Income Tax

Tribunal remands issues to CIT(A) for fresh decision, ensures assessee's right to be heard. Revenue appeal allowed.

The ACIT Circle- 1, Jaipur Versus Shri Shyam Sunder Khandelwal P/o M/s. Sumangal Gems

The Tribunal remanded all three issues to the CIT(A) for a fresh decision, providing the assessee with a reasonable opportunity to be heard and ... Non-speaking order by CIT(A) - Transactions through PMS – STCG treated as business income – Held that:- The AO and revenue’s contentions regarding the frequency of intermixing and interlacing of funds have not been objectively answered by the CIT(A) besides the crucial fact whether there was intra-account transfer from business stock to investment stock of shares or vice versa has not been spelt out - It is acceptable that the assessee can maintain business & investment portfolio separately which an ideal situation should be taxed under the head business income and capital gains respectively - But this presupposes the neat and clean state of affairs in which there is neither intermixing nor interlacing of funds and there are no internal / journal transfer from one account to other to keep the check in clandestine method. LTCG on sale of shares – Claim of exemption u/s 10(38) – Held that:- In respect of shares of M/s. Share Street (P) Ltd., there is a huge gap between the valuation of private company’s equity shares arrived at by the AO and claimed by the assessee as facts emerges that the assessee has claimed these shares in investment account and they are available at reduced rate of taxation - assessee did not spell out any market credentials of the shares of M/s. Share Street (P) Ltd. nor the product range or worth of the company - there is no factual elucidation about the turnover and assets of this company so as to work out the valuation of unquoted equity shares at ₹ 65/- per share - CIT(A) without adverting to any factual observations has allowed the relief by summary observation which cannot be upheld. Disallowance u/s 14A r.w. Rule 8D – Held that:- The amount has been disallowed against the interest paid on loans by applying the provision of Rule 8D which on the face of its seems to be excessive - CIT(A) instead of giving any factual projection by summary observation has deleted the entire addition – Thus, the issue should be restored back to the file of the CIT(A) to pass a speaking order on the facts and circumstances of the case duly considering the factual issues raised by the AO in his order about the intermixing and interlacing of the funds and possibility of internal transaction from business account to investment account portfolios – also , the shares of M/s. Share Street (P) Ltd. needs to be correctly worked out and also the disallowance u/s 14A should be considered – thus, the matter is remitted back to the CIT(A) for fresh adjudication – Decided in favour of revenue. Issues Involved1. Treatment of Short-Term Capital Gains (STCG) from Portfolio Management Services (PMS) as business income.2. Treatment of Long-Term Capital Gains (LTCG) from PMS and sale of unlisted shares as business income.3. Disallowance of expenses under Section 14A read with Rule 8D.Issue-Wise Detailed Analysis1. Treatment of STCG from PMS as Business IncomeThe Revenue challenged the deletion of Rs. 20,40,619/- disallowance by the Assessing Officer (AO), who treated the STCG from PMS transactions as business income. The AO argued that the assessee was involved in continuous equities trading, thus clubbing business transactions with investment transactions under business income. The CIT(A) observed that the assessee maintained separate books for investments and business, consistently showing PMS investments as capital gains since FY 2004-05. Judicial precedents supported treating such transactions as capital gains if reflected as investments in the balance sheet. The Tribunal found that the CIT(A) failed to objectively address the AO's concerns about the intermixing of funds and intra-account transfers. The issue was remanded to the CIT(A) for a fresh decision, considering these factors.2. Treatment of LTCG from PMS and Sale of Unlisted Shares as Business IncomeThe Revenue contested the deletion of Rs. 44,55,906/- disallowance by the AO, who treated LTCG from PMS and sale of shares of M/s. Share Street (P) Ltd. as business income. The AO argued that the transactions were frequent and intermingled, indicating a business motive. The CIT(A) noted that the assessee consistently treated these shares as investments since 2005-06 and directed treating the gains as capital gains. The Tribunal found that the CIT(A) did not adequately address the AO's valuation concerns regarding the unlisted shares of M/s. Share Street (P) Ltd. The issue was remanded to the CIT(A) for a detailed examination of the market credentials and valuation of these shares.3. Disallowance of Expenses under Section 14A read with Rule 8DThe Revenue disputed the deletion of Rs. 30,16,695/- disallowance by the AO under Section 14A read with Rule 8D, arguing that the assessee used borrowed funds for earning exempt dividend income. The CIT(A) found that the investments were made from the assessee's capital, and no borrowings were used for these investments. The Tribunal noted that the CIT(A) did not provide a factual basis for deleting the entire disallowance and remanded the issue for a fresh decision, considering the factual issues raised by the AO.ConclusionThe Tribunal remanded all three issues to the CIT(A) for a fresh decision, providing a reasonable opportunity for the assessee to be heard and considering the factual and legal aspects raised by the AO. The appeal of the Revenue was allowed for statistical purposes, and the cross-objection of the assessee was dismissed.