2019 (1) TMI 1636 - AT - Income Tax

Tribunal Upholds Business Income Treatment for Share Transactions & Deletes Disallowance

Assistant Commissioner of Income Tax, Circle-2 (1), Indore Versus Dr. Rajeev Choudhary

The Tribunal upheld the Assessing Officer's decision to treat income of Rs. 1,18,57,282 from the sale and purchase of shares as business income due to the ... Correct head of income - Income earned from sale and purchase of share - STCG OR business income - Whether considering the magnitude, intention, frequency of transactions which reflects modus operandi of assessee of share business as an adventure in the nature of trade? - HELD THAT:- As observed that the assessee is maintaining the details/records of purchase/sale of equity shares as if it is running a business. It is consistently maintaining the books of account showing the details of equity shares under the head opening stock, closing stock, purchases & sales and gross profit which is a regulars real feature of showing the business transactions. Normally there is no requirement to get audited the gain/loss from purchase and sale of equity shares claimed under the head short term capital gain by an auditor but the assessee has disclosed all the transactions relating to equity shares under the head profit and loss account and got it certified by the auditor. Frequency of transactions also plays vital role in examining taxability of such transactions. Though it is pleaded that the assessee is a very busy Doctor engaged in the professional work but what transpires from the records is that the assessee is devoting his time and knowledge for regular purchase and sale of equity shares round the year. Even otherwise there is no Estoppel by law on the assessee to carry more than one business or profession. There are innumerable instances where a particular individual carries on multiple businesses from multiple locations then why cannot the assessee. The situation in the case of assessee seems to be different because assessee is keeping continuous watch on the share market. He selects various scripts for regular purchase and sale and he is also engaged in the future and option market. Hundreds of transactions have been entered with the same brokers for purchase/sale. No separate demat account have been kept by the assessee relating to the alleged investment in equity shares and profit and sale from share trading and future and option. In these given facts it is hard to believe that such gain from such magnitude of transactions can be taxed under the head of short term capital gain. AO was fair enough to give the benefit of exemption for the long term capital gain but as regards the alleged income we find merit in the finding of Ld. AO and are inclined to hold that the alleged income of is purely income from business from purchase/sale of shares and therefore, is to be taxed as a business income. We, therefore, allow the grounds raised by the revenue and dismiss the ground no.1 raised in the cross objection filed by the assessee. Disallowance u/s. 14A - HELD THAT:- In the absence of such satisfaction on the part of the assessing officer as well as the fact that the assessee has not claimed any expenditure in the profit and loss account to earn the exempted income we find that the judgment of Coordinate Mumbai Bench in the case of ACIT vs. Sachin R. Tendulkar [2017 (1) TMI 1339 - ITAT MUMBAI] is squarely applicable on the assessee wherein it was held that “ as no expenses were claimed in the profit and loss account attributable to the earning of exempt income, therefore no disallowance is called for u/s 14A of the Act r.w. Rule-8D. No disallowance was called for u/s 14A by the assessing officer. We therefore, set aside the finding of the Ld. CIT(A) and delete the disallowance made by the assessing officer byway invoking provision of section 14A of the Act. Thus, ground no.2 of the cross objection filed by the assessee is allowed. Issues Involved:1. Classification of income from sale and purchase of shares as Short Term Capital Gain (STCG) or Business Income.2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.Detailed Analysis:1. Classification of Income from Sale and Purchase of Shares:The primary issue was whether the income of Rs. 1,18,57,282 from the sale and purchase of shares should be treated as Short Term Capital Gain (STCG) or Business Income. The Assessing Officer (AO) treated this income as business income, citing the magnitude, intention, and frequency of transactions, suggesting that the assessee was engaged in share trading as an adventure in the nature of trade. The AO noted that the assessee was involved in substantial share transactions, purchasing shares worth Rs. 12,02,54,365 and selling them for Rs. 14,20,85,990, indicating the dominant intention of trading rather than investment.The assessee, a practicing doctor, argued that these transactions were investments made from personal funds, similar to other investments like PPF and fixed deposits. The assessee maintained that the nature of transactions should be determined based on facts and circumstances, not merely on the volume or frequency of transactions. The assessee also highlighted that no borrowed funds were used for these investments, and the transactions were outside the line of the medical profession.The Tribunal examined the facts and found that the assessee engaged in regular and systematic transactions of purchase and sale of shares, including futures and options (F&O), indicating a business activity. The Tribunal noted that the assessee maintained detailed records of these transactions, similar to business accounts, and the transactions were frequent and substantial, involving multiple brokers and numerous transactions throughout the year. Consequently, the Tribunal upheld the AO's decision, treating the income of Rs. 1,18,57,282 as business income rather than STCG.2. Disallowance under Section 14A read with Rule 8D:The second issue involved the disallowance of Rs. 2,15,542 under Section 14A read with Rule 8D, related to expenses incurred for earning exempt income (dividend income of Rs. 4,37,354). The AO applied the provisions of Section 14A and Rule 8D to compute the disallowance.The assessee argued that no direct or indirect expenditure was incurred to earn the exempt income, and the AO did not provide any dissatisfaction with the assessee's claim. The assessee had already disallowed Rs. 66,700 for expenses related to long-term capital gains, which were exempt.The Tribunal found that the AO did not record any satisfaction regarding the nexus of interest-bearing funds or other expenses with the exempt income. It was noted that the assessee did not claim any expenditure in the profit and loss account for earning the exempt income. The Tribunal referred to the judgment of the Mumbai Bench in the case of ACIT vs. Sachin R. Tendulkar, where it was held that no disallowance under Section 14A is called for if no expenses were claimed in the profit and loss account attributable to the earning of exempt income.Therefore, the Tribunal set aside the disallowance of Rs. 2,15,542 made by the AO under Section 14A, allowing the assessee's claim.Conclusion:- The Tribunal upheld the AO's decision to treat the income of Rs. 1,18,57,282 from the sale and purchase of shares as business income.- The Tribunal deleted the disallowance of Rs. 2,15,542 made under Section 14A, as the AO did not establish any dissatisfaction with the assessee's claim, and no expenses were claimed for earning the exempt income.Result:- The appeal of the revenue was allowed.- The cross-objection of the assessee was partly allowed.