2016 (4) TMI 739 - AT - Income Tax

Tax Tribunal Rules on Share Sale Profit Classification and Disallowance, Upholding STCG Treatment

The Tribunal concluded that the profit from the sale of shares held as investments should be taxed as short-term capital gains (STCG) and not as business ... Profit from sale of shares - business income OR short-term capital gain - Held that:- CIT(Appeals) found merit in the contention raised on behalf of the assessee before him that the Circular No. 4 of 2007 issued by the CBDT and relied upon by the Assessing Officer actually supported the case of the assessee keeping in view that two separate portfolios for the shares purchased as investment and shares purchased as stock-in-trade were maintained by the assessee. Accordingly, the ld. CIT(Appeals) held that the profit was earned by the assessee on the shares and securities purchased and held as investment and the same, therefore, was chargeable to tax in the hands of the assessee as short-term capital gains and not business income. Disallowance under section 14A - Held that:- It is observed that Rule 8D is applicable for the year under consideration and the AO has applied the said Rule to work out the disallowance under section 14A on account of the expenses incurred in relation to the exempt income in the form of dividend and LTCG. At the time of hearing before us the ld. Counsel for the assessee did not raise any contention to dispute the applicability of Rule 8D. The limited contention raised by him is that the assessee has already having made disallowance of ₹ 34,67,355/- under section 14A of the Act as against the disallowance of ₹ 80,46,448/- worked out by the AO by applying Rule 8D, the net addition should be made to the extent of ₹ 80,46,448/- - ₹ 34,67,355/-. We find merit in the contention of the ld. Counsel for the assessee. Accordingly, we direct the AO to restrict the addition on this issue to ₹ 45,79,093/-. Issues Involved:1. Classification of income from the sale of shares as business income versus short-term capital gain.2. Quantum of disallowance under Section 14A of the Income Tax Act.Detailed Analysis:Issue 1: Classification of Income from Sale of SharesFacts and Arguments:The assessee, a company engaged in dealing with shares and securities and providing financial consultancy services, declared income from the sale of shares as short-term capital gain (STCG). The Assessing Officer (AO) reclassified this income as business income, citing past assessments where similar transactions were treated as business income. The assessee contended that it maintained separate Demat accounts for shares held as stock-in-trade and investments, and the shares in question were held as investments.CIT(A) Decision:The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's treatment of the income as STCG. The CIT(A) noted that the assessee valued investments on the principle of 'lower of cost or market value' and did not claim any valuation loss, indicating the shares were held as investments. The CIT(A) also observed that the AO's findings were factually incorrect regarding the volume of transactions and that the AO had accepted the assessee's classification of long-term investments in previous years.Tribunal Decision:The Tribunal upheld the CIT(A)'s decision, agreeing that the shares were held as investments and thus the profit should be treated as STCG. The Tribunal noted that the assessee maintained separate portfolios and Demat accounts for investments and stock-in-trade, and previous assessments had accepted similar classifications. The Tribunal also referenced CBDT Circular No. 4 of 2007 and judicial precedents supporting the assessee's claim.Conclusion:The Tribunal concluded that the profit from the sale of shares held as investments should be taxed as STCG and not as business income, dismissing the Revenue's appeal on this ground.Issue 2: Disallowance under Section 14AFacts and Arguments:The assessee received exempt income in the form of dividends and long-term capital gains (LTCG). The AO disallowed Rs. 80,46,448 under Section 14A, consisting of direct expenditure on dividends and administrative expenses calculated under Rule 8D. The assessee had already disallowed Rs. 34,67,355 on its own.CIT(A) Decision:The CIT(A) partially agreed with the assessee, noting that the AO's calculation was excessive and factually incorrect. The CIT(A) directed the AO to restrict the disallowance to the amount calculated by the assessee for computing book profit under Section 115JB.Tribunal Decision:The Tribunal observed that Rule 8D was applicable for the year under consideration. The Tribunal accepted the assessee's contention that the net addition should be the difference between the AO's calculation and the amount already disallowed by the assessee. Thus, the Tribunal directed the AO to restrict the addition to Rs. 45,79,093.Conclusion:The Tribunal partly allowed the Revenue's appeal, directing a revised disallowance under Section 14A to Rs. 45,79,093.Final Order:The appeal filed by the Revenue was partly allowed, with the Tribunal upholding the CIT(A)'s decision on the classification of income from the sale of shares and modifying the disallowance under Section 14A.Order Pronounced:The order was pronounced in the open Court on 15th April, 2016.