2015 (10) TMI 1879 - AT - Income Tax

Tax Tribunal Decision: Capital Gains, Expense Allocation, Section 14A Disallowance, Interest Restriction

The Tribunal partly allowed the Revenue's appeal, determining that the long term capital gain and short term capital loss were not speculative ... Treatment to long term capital gain and short term capital gain loss - CIT(A) directing AO not to treat the long term capital gain and short term capital gain loss as speculation transactions - Held that:- No infirmity in the conclusion of the ld. Commissioner of Income Tax (Appeals) because there is no positive income available for taxation for the current year and even if, these are held to be speculative transactions, the loss was required to be set off against the profit during the year itself as per sub-section 1 to section 73. However, we are in agreement with the finding of the ld. Commissioner of Income Tax (Appeals) that the LTCG and STCG were not speculative transactions. - Decided against revenue. Addition of the apportioned expenditure towards speculation activity - CIT(A) deleted part addition - Held that:- As we have upheld the stand of the ld. Commissioner of Income Tax (Appeals) that such gains/losses were not speculative transaction, thus, under these circumstances, allocation of expenses was not required. The Assessing Officer treated the allocation of expenses to be speculative activity of the assessee on the basis of percentage of income/profit. Ultimately, it is the turnover, which requires incurring of expenses, thus, we are in agreement with the finding of the ld. Commissioner of Income Tax (Appeals) that the allocation of expenses was required to be made on the basis of turnover as offered by the assessee because the assessee itself considered stamp duty expenses of ₹ 1,00,729/-, transaction charges of Rs, 51,832/- and STT of ₹ 5,23,542/- as expenses, thus, we find no infirmity in directing to consider stamp duty expenses, STT and transaction charges/additional expenses pertaining to speculation activity granting part relief to the assessee. The stand of the ld. Commissioner of Income Tax (Appeals) is affirmed.- Decided against revenue. Re-work the disallowances made u/s 14A by excluding the stock in trade from the value of investments as directed by CIT(A) - Held that:- Without going into much deliberation, we note that under the facts available on record to this limited extent, we are in agreement with the ld. DR/Assessing Officer that the provision of section 14A read with Rule-8D of the Rules are applicable. The Tribunal, in the case of Dy.CIT vs Damani Estates and Finance Pvt. Ltd. (2013 (8) TMI 457 - ITAT MUMBAI) has clarified that Rule 8D shall apply qua the shares held as stock-in-trade. The Tribunal has, therefore, in effect confirmed its earlier order, passed by its Special Bench, in ITO vs Daga Capital Management Pvt. Ltd. (2008 (10) TMI 383 - ITAT MUMBAI). However, the Tribunal has clarified that the disallowance in respect of proportionate interest shall be restricted to 20% of such interest. Subject to this modification, we confirm the application of section 14A read with Rule-8D - Decided partly in favour of revenue Issues:1. Treatment of long term capital gain and short term capital gain loss as speculation transactions.2. Allocation of expenditure towards speculation activity.3. Disallowance u/s 14A by excluding stock in trade from the value of investments.Issue 1: Treatment of Capital Gain/Loss as Speculation TransactionsThe appellant Revenue challenged the direction given by the ld. First Appellate Authority regarding the treatment of long term capital gain and short term capital gain loss as speculation transactions. The Assessing Officer initially treated the loss on trading shares as deemed speculation, but the assessee argued that the shares were held as investments and not for speculation. The ld. Commissioner of Income Tax (Appeals) agreed with the assessee, stating that the provisions of section 73 did not apply to shares held as investments. The Tribunal concurred, noting that the assessee was engaged in trading shares as investments and not as part of a speculative business. The Tribunal upheld the Commissioner's decision that the long term capital gain and short term capital loss were not speculative transactions, and any losses could be set off against profits during the same year.Issue 2: Allocation of Expenditure Towards Speculation ActivityThe second issue involved the allocation of expenditure towards speculation activity. The Assessing Officer had apportioned expenses towards speculation activity based on a percentage of income/profit. However, the Tribunal, in line with the ld. Commissioner of Income Tax (Appeals), found that such gains/losses were not speculative transactions. Therefore, the allocation of expenses based on income/profit percentage was deemed unnecessary. The Tribunal agreed with the Commissioner's decision to consider expenses based on turnover, as offered by the assessee, and granted partial relief by excluding certain expenses related to speculation activity.Issue 3: Disallowance u/s 14A by Excluding Stock in TradeThe final issue concerned the direction to the Assessing Officer to rework the disallowances made under section 14A by excluding stock in trade from the value of investments. The assessee had claimed exempt dividend income and made a partial disallowance under section 14A. However, the Assessing Officer invoked Rule-8D and made a higher disallowance. The Tribunal agreed with the ld. Commissioner of Income Tax (Appeals) that section 14A read with Rule-8D applied, especially to shares held as stock-in-trade. The Tribunal confirmed the application of Rule-8D but restricted the disallowance in respect of proportionate interest to 20%. Thus, this ground of the Revenue's appeal was partly allowed.In conclusion, the Tribunal partly allowed the appeal of the Revenue, addressing the issues related to the treatment of capital gain/loss, allocation of expenditure towards speculation activity, and disallowance under section 14A by excluding stock in trade from the value of investments. The Tribunal's decision was pronounced in the open court on 20/07/2015.