2016 (9) TMI 652 - AT - Income Tax

Tribunal rules on capital gains vs. business income, speculation income, and section 14A disallowance

Deputy Commissioner of Income-tax, Circle-6, Kolkata Versus Lokenath Saraf Securities Pvt. Ltd. and Vica-Versa

The tribunal held that the short-term capital gains from the sale of shares held as 'investment' should be treated as capital gains, not business income, ... Sale of shares and securities held as ‘investment’ - short term capital gains or income from business - Dual portfolio - Held that:- There is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. In the instant case, the ld AO himself admits that the assessee maintains two separate portfolios in the year under appeal and also in the earlier years. The books of accounts of the assessee also support the same. The books of accounts of the assessee were not rejected by the ld AO and the stand of the assessee in offering long term capital gains under investment portfolio is not disputed by the revenue. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above, we hold that the net surplus on sale of shares under investment portfolio should be chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. Disallowance u/s 14A - Held that:- As decided in assessee’s own case in Asst Year 2005-06 as observed that in the relevant year under consideration i.e. A.Y. 2005-06, Rule 8D was not applicable and, therefore, the disallowance under section 14A on account of expenditure incurred by the assessee in relation to the exempt income is required to be made on some reasonable basis. In this regard, this Tribunal has taken a consistent view that the disallowance under section 14A on account of expenses incurred in relation to the income at 1% of such exempt income would be fair and reasonable. Following this consistent stand taken by the Tribunal, we restrict the disallowance under section 14A to the extent of 1% of the exempt income in the form of dividend and long-term capital gain Issues Involved:1. Whether the short-term capital gains on the sale of shares held as 'investment' should be treated as income from business.2. Whether the normal business income in the Futures & Options (F&O) segment should be treated as speculation income.3. Whether the valuation of shares of Reliance Industries Ltd. using FIFO method was justified.4. Whether the disallowance under section 14A of the Income Tax Act was appropriate.Detailed Analysis:Issue 1: Short-Term Capital Gains vs. Business IncomeThe primary issue was whether the short-term capital gains of Rs. 11,05,41,076 on the sale of shares and securities held as 'investment' should be treated as income from business. The assessee maintained dual portfolios (investment and trading) with separate accounts and codes for each. The Assessing Officer (AO) argued that the shares were not held for earning dividends but for making gains, and thus should be treated as business income. However, the tribunal noted that the assessee had consistently maintained dual portfolios, which was accepted by the revenue in previous years. The tribunal emphasized the principle of consistency and held that the gains from the investment portfolio should be treated as capital gains, not business income. The tribunal also noted that the assessee's intention to hold shares as investments was evident from the longer holding periods and the fact that the shares were transferred at the beginning of the year through a board resolution.Issue 2: F&O Segment Income as Speculation IncomeThe second issue was whether the normal business income of Rs. 2,25,36,746 in the F&O segment should be treated as speculation income. The tribunal referred to its earlier decision in the assessee's case for the assessment year 2005-06, where it was held that income from F&O transactions prior to 24.01.2006 should be treated as speculation income. Based on this precedent, the tribunal upheld the treatment of the F&O segment income as speculation income.Issue 3: Valuation of Reliance Industries Ltd. SharesThe third issue was whether the AO was justified in valuing the shares of Reliance Industries Ltd. at the lower of cost or market price using the FIFO method. The tribunal noted that since it had already decided that the surplus from the investment portfolio should be treated as short-term capital gains, there was no need to adjudicate this issue further. Consequently, this ground became infructuous.Issue 4: Disallowance under Section 14AThe final issue was the disallowance under section 14A of the Income Tax Act. The tribunal referred to its earlier decision in the assessee's case for the assessment year 2005-06, where it was held that disallowance under section 14A should be made on a reasonable basis, and 1% of the exempt income was considered fair and reasonable. Following this precedent, the tribunal directed the AO to disallow 1% of the exempt income, amounting to Rs. 1,21,547.ConclusionThe tribunal dismissed the revenue's appeal as not maintainable and partly allowed the assessee's appeal. The short-term capital gains were to be treated as capital gains, the F&O segment income was to be treated as speculation income, the issue of valuation of Reliance Industries Ltd. shares was rendered infructuous, and the disallowance under section 14A was restricted to 1% of the exempt income.