2016 (11) TMI 657 - AT - Income Tax

Assessee's Appeal Partially Succeeds: Share Transactions, Interest Expenditure, Section 14A

The Tribunal partially allowed the assessee's appeal, dismissing the assessment of income from share transactions as business income instead of short term ... Income from share transaction - short term capital gain or business income - Held that:- From the facts discussed in the assessment order, it is found that out of total 41 transactions in shares, 39 shares were held for less than a month. Further, it has been found by the Assessing Officer that in 22 scrips, the assessee had made repeated entry and exit which indicate the intention of the assessee to trade in shares rather than holding it as investment. The Assessing Officer has also observed that the assessee had used borrowed funds for investing in shares. The learned Commissioner (Appeals) has also approved the aforesaid finding of the Assessing Officer. No material has been brought by the assessee before us to controvert the aforesaid factual findings of the Departmental Authorities. In the aforesaid view of the matter, we do not find any reason to interfere with the order of the learned Commissioner (Appeals). Disallowance of interest - Held that:- Assessing Officer while treating the income derived from share transaction as business income has actually allowed the interest expenditure of ₹ 7,24,408 and assessed the net business income of ₹ 23,12,136. Therefore, the ground raised by the assessee before the learned Commissioner (Appeals) challenging the disallowance of interest expenditure by the Assessing Officer was misconceived. Similarly, the observations of the learned Commissioner (Appeals) upholding the disallowance of interest expenditure by the Assessing Officer is unnecessary and unwarranted. Before us also, the assessee has raised this ground challenging disallowance of expenditure from short term capital gain. Alternatively, assessee has claimed that even if the income from share transaction is assessed under the head “Business” the interest expenditure is allowable under section 37(1). As we have already noted, the Assessing Officer while computing income from share transaction under the head business income has allowed the interest expenditure to ₹ 7,24,408. That being the case, there is no question of disallowance of interest expenditure, therefore, the ground raised by the assessee being infructuous is not required to be adjudicated upon, hence, dismissed. Addition under section 14A r/w rule 8D - Held that:- While computing the income from share transaction under the head Business, the Assessing Officer has allowed the entire interest of ₹ 7,24,408. This action of the Assessing Officer demonstrates that the interest expenditure is related entirely to earning of taxable income from share transaction, hence, no part of it can be apportioned towards the exempt income earned by the assessee. Therefore, in our considered opinion, no disallowance out of interest expenditure can be made in terms of rule 8D(2)(ii). However, as far as disallowance of 0.5% of the average value of investment in terms of rule 8D(2)(iii) is concerned, we agree with the view of the Departmental Authorities Issues:1. Assessment of income from share transaction as business income instead of short term capital gain.2. Disallowance of interest expenditure.3. Disallowance of expenditure under section 14A r/w rule 8D.Issue 1: Assessment of income from share transactionThe appeal was filed against the order upholding the Assessing Officer's decision to treat income from share transactions as business income instead of short term capital gain. The Assessing Officer found that the assessee engaged in frequent purchase and sale of shares, with most transactions held for less than a month. The officer observed repetitive transactions and substantial investments made from borrowed funds. The Commissioner (Appeals) agreed with the Assessing Officer's view. The Tribunal noted the factual findings and upheld the decision, stating that no material was presented to counter the Department's findings. Therefore, ground no.1 was dismissed.Issue 2: Disallowance of interest expenditureThe Assessing Officer allowed interest expenditure while computing income from share transactions as business income. The assessee challenged this disallowance of interest expenditure before the Commissioner (Appeals), who upheld the decision. The Tribunal observed that the Assessing Officer had actually allowed the interest expenditure and assessed the net business income accordingly. As the interest expenditure was already allowed, the ground challenging the disallowance was deemed unnecessary and dismissed by the Tribunal.Issue 3: Disallowance of expenditure under section 14A r/w rule 8DThe Assessing Officer disallowed expenditure under section 14A r/w rule 8D due to exempt income earned by the assessee. The disallowance was computed based on rule 8D(2)(ii) and (iii), resulting in a total disallowance of a specific amount. The Commissioner (Appeals) confirmed this disallowance. The Tribunal noted that the interest expenditure entirely related to earning taxable income from share transactions, and thus no part of it could be attributed to the exempt income. Therefore, the Tribunal disallowed the disallowance under rule 8D(2)(ii) but upheld the disallowance under rule 8D(2)(iii), partially allowing ground no.3.In conclusion, the Tribunal partially allowed the assessee's appeal, dismissing ground no.1, deeming the challenge to interest expenditure disallowance unnecessary, and partially allowing ground no.3 concerning the disallowance of expenditure under section 14A r/w rule 8D.