Tribunal allows appeal, restricts disallowance under Section 14A, directs capital gains tax treatment.

Triune Projects Pvt. Ltd. Versus DCIT, Circle-16 (1), New Delhi

Triune Projects Pvt. Ltd. Versus DCIT, Circle-16 (1), New Delhi - TMI Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Recharacterization of short-term capital gains as business income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The assessee contested the disallowance of Rs. 31,28,928 made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The AO found that the assessee had made investments in shares, mutual funds, and bonds, generating exempt income. The AO computed the disallowance as Rs. 37,62,910 but after considering the assessee's own disallowance of Rs. 13,43,545, the net disallowance was Rs. 24,20,365. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld a disallowance of Rs. 31,28,928, leading to a net disallowance of Rs. 17,85,383 after deducting the assessee's disallowance.

The Tribunal noted that the AO applied Rule 8D without recording satisfaction that the assessee's computation was incorrect. The AO issued a show-cause notice without examining the assessee's disallowance of 10% of the exempt income. According to the Tribunal, the AO must record satisfaction regarding the assessee's computation before invoking Rule 8D, as mandated by the Delhi High Court in CIT vs. Taikisha Engineering Ltd. The Tribunal also held that investments in subsidiaries are strategic and should not be included in the disallowance computation under Section 14A, citing CIT vs. Holcim India Pvt. Ltd.

The Tribunal found the disallowance of Rs. 30,18,766 out of Rs. 35,14,664 of indirect expenditure incomprehensible. Consequently, the Tribunal reversed the CIT(A)'s order and restricted the disallowance to Rs. 13,43,545, as computed by the assessee.

2. Recharacterization of Short-term Capital Gains as Business Income:
The assessee reported long-term capital gains of Rs. 75,01,260 and short-term capital gains of Rs. 32,35,452 from the sale of shares, mutual funds, and portfolio management schemes, classifying them as investment assets. The AO recharacterized the short-term capital gains as business income, arguing that the investments were made from business income and citing Form 10DC, which labeled the transactions as business activities. The CIT(A) upheld the AO's decision, noting the high turnover and intent to maximize profits.

The Tribunal observed that the investments were classified as investments in the balance sheet and funded by the assessee's own funds, not borrowed funds. The assessee's principal business was consultancy, not trading in securities. The Tribunal rejected the AO's reliance on Form 10DC, stating that it only reflects transaction values for securities transaction tax purposes and does not determine the nature of income. The Tribunal cited Delhi High Court rulings in Yamaha Ltd. vs. ACIT and Radials International vs. ACIT, which held that gains from mutual funds in portfolio management schemes are taxable as capital gains, not business income.

The Tribunal concluded that the short-term capital gains from mutual funds and shares should be taxed as capital gains, not business income. The Tribunal reversed the CIT(A)'s findings and directed the AO to tax the gains under the head capital gains.

Conclusion:
The Tribunal allowed the appeal, reversing the CIT(A)'s orders on both issues. The disallowance under Section 14A was restricted to Rs. 13,43,545, and the short-term capital gains were to be taxed as capital gains, not business income. The order was pronounced in the open court on 10.02.2016.