2018 (5) TMI 345 - AT - Income Tax

Tribunal upholds disallowance on dividend income but remits income classification issue for further review.

ACIT - 3 (1) (2), Mumbai Versus M/s. Golden Life Financial Services Pvt. Ltd. (formerly Lifeline Inusrance Distribution Co. Pvt. Ltd.)

The Tribunal dismissed the Revenue's appeal regarding the disallowance under Section 14A, upholding the restriction of disallowance to the dividend income ... Disallowance under Section 14A - CIT(A) upheld the contention of the assessee that the disallowance under Section 14A cannot exceed the dividend earned - Held that:- The issue stands covered in favour of the assessee by case law Cheminvest Ltd. vs. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] as held that disallowance under Section 14A cannot exceed the dividend income earned. Accordingly in the background of aforesaid precedents we do not find any infirmity in the order of the learned CIT(A) Nature of income - income arising from “the investment portfolio” - Short Term Capital Gain OR Business Income - Held that:- In the present case no where the assessee has claimed that these transactions are delivery based.Only the aspect that assessee can maintain an investment and trading portfolio. CIT(A) has totally erred in not examining the facts of the case in the entirety as to whether they were in accordance with the facts operating in the aforesaid decision of the Hon’ble Bombay High Court. Moreover learned CIT(A) has not given any finding as to whether the transaction in the present case are delivery based on not. Furthermore the observation of the AO that assessee has obtained huge amount of loan to make these investments has also not been considered by the learned CIT(A). CIT(A)is directed to consider the issue afresh and give proper finding as to whether the issue can be said to be decided in favour of the assessee on the basis of the ratio emanating from the Hon’ble Bombay High Court decision in the case of Gopal Purohit (2009 (2) TMI 233 - ITAT BOMBAY-G) - Decided in favour of revenue for statistical purposes. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Classification of income from the investment portfolio as Short Term Capital Gain versus Business Income.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A read with Rule 8D to Rs. 4,69,605 as opposed to Rs. 33,49,507 determined by the AO. The AO had disallowed Rs. 33,49,507, which included proportionate interest and 0.5% of the average value of investments. The CIT(A) upheld the assessee's contention that the disallowance under Section 14A cannot exceed the dividend earned, which was Rs. 4,69,605.Upon appeal, the Tribunal referred to precedents, specifically Cheminvest Ltd. vs. CIT and Pr. CIT vs. Ballarpur Industries Ltd., where it was held that disallowance under Section 14A cannot exceed the dividend income earned. Consequently, the Tribunal found no infirmity in the CIT(A)'s order and confirmed the restriction of the disallowance to the dividend income earned. Thus, this ground of the appeal by the Revenue was dismissed.2. Classification of Income from Investment Portfolio:The Revenue contested the CIT(A)'s decision to treat the income of Rs. 1,70,31,749 from the investment portfolio as Short Term Capital Gain instead of Business Income. The AO had reclassified this income as Business Income, citing the volume and frequency of transactions, and the use of borrowed funds, indicating that the assessee was engaged in share trading rather than investment.The CIT(A) found that the assessee maintained separate portfolios for investment and trading, supported by board resolutions and audited financial statements. The CIT(A) referred to the decision in Gopal Purohit vs. JCIT, which allowed for separate treatment of delivery-based investment transactions and trading activities. The CIT(A) concluded that the assessee's transactions were in line with this precedent and directed the AO to treat the income as Short Term Capital Gain.The Tribunal, upon review, noted that the CIT(A) had not thoroughly examined whether the transactions were delivery-based, a crucial aspect highlighted in the Gopal Purohit decision. Additionally, the CIT(A) did not address the AO's observation regarding the use of substantial borrowed funds for these investments. Consequently, the Tribunal remitted the issue back to the CIT(A) for a fresh examination, directing a detailed analysis to ensure the facts align with the precedent set by the Bombay High Court in Gopal Purohit. The CIT(A) was instructed to provide the assessee with an adequate opportunity to be heard.Conclusion:The appeal by the Revenue was partly allowed for statistical purposes, with the Tribunal confirming the CIT(A)'s decision on the disallowance under Section 14A but remitting the issue of income classification back to the CIT(A) for further scrutiny. The order was pronounced in the open court on 2nd May 2018.