2019 (6) TMI 432 - AT - Income Tax

Tribunal rules on Short-Term Capital Gains treatment, directs recalculating Section 14A disallowance

The Tribunal ruled that Short-Term Capital Gains (STCG) should be treated as capital gains, overturning the lower authorities' decision to treat them as ... Classification of income - share trading as ‘business income’ or ‘capital gains’ share - STCG - Period of holding - HELD THAT:- It is settled law that there is no bar for the assessee to maintain two separate portfolios-one for investment and one for trading See GOPAL PUROHIT [2010 (11) TMI 222 - SC ORDER] The perusal of assessee’s personal Balance Sheet as placed on record would reveal that majority of the investments have been funded out of assessee’s own capital. The assessee has earned dividend income of ₹ 34.45 Lacs during impugned AY. Another pertinent fact to be noted that the assessee has income from garment business to the tune of ₹ 47.30 Lacs which would prima-facie, establish that share trading was not the only activity carried out by the assessee during impugned AY. Apart from this, the assessee was also carrying on the business of finance & investment in another proprietorship concern during impugned AY. The average holding period is more than 100 days. Further, the long-term gains earned on similar activity has been accepted by the revenue as Capital Gains only. Moreover, latest CBDT Circular No.6/2016, which is clarificatory in nature, applies to listed securities and directs AO not to disturb the stand taken by assessee provided the same is applied consistently. Hence, we find that there could not be any straight jacket formula to distinguish the same and further there cannot be any single decisive factor to determine the same but an overall view has to be taken keeping in mind peculiar facts and circumstances of the case. Accordingly, after weighing all the factors as cited above, we find ourselves in agreement with the submissions of Ld. AR and therefore, inclined to hold that the impugned gains were rightly offered as Capital Gains. By reversing the stand of lower authorities, we allow this ground of appeal. See GOPAL PUROHIT [2010 (1) TMI 7 - BOMBAY HIGH COURT] Disallowance u/s 14A - HELD THAT:- AR has submitted that in terms of decision of Delhi Tribunal (Special Bench) in ACIT Vs. Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] only exempt income yielding investments were to be considered to arrive at the said disallowance. Concurring with the same, Ld. AO is directed to compute the disallowance by considering those investments which have yielded exempt income during the year. Issues Involved:1. Treatment of Short-Term Capital Gains as Business Income.2. Disallowance of Interest Expense under Section 14A of the Income-Tax Act.Detailed Analysis:1. Treatment of Short-Term Capital Gains as Business Income:The main issue was whether the Short-Term Capital Gains (STCG) amounting to Rs. 51,70,511 should be treated as business income or capital gains. The assessee argued that they maintained two separate portfolios for shares, one for investment and one for trading, and that in previous and subsequent assessment years, the revenue had consistently accepted the STCG as capital gains. The Assessing Officer (AO) treated the STCG as business income due to the high volume and short holding period of transactions. The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld this view, noting that the assessee was involved in investments and finance as a business, and the transactions were frequent, indicating a profit motive rather than investment intent.Upon appeal, the Tribunal considered several factors, including the assessee's history of treating similar gains as capital gains, the holding period of shares, and the funding source of investments. The Tribunal referred to the principle of consistency and noted that the revenue had accepted similar claims in other years. They also cited relevant judicial pronouncements and CBDT circulars, which allow taxpayers to maintain separate portfolios for investment and trading. The Tribunal concluded that the STCG should be treated as capital gains, reversing the lower authorities' decision.2. Disallowance of Interest Expense under Section 14A:The second issue was the disallowance of Rs. 5,42,245 under Section 14A of the Income-Tax Act, which pertains to expenditure incurred in relation to earning exempt income. The AO applied Rule 8D to compute the disallowance, which was upheld by the CIT(A). The assessee argued that only the expenditure directly related to earning dividend income should be considered and that Rule 8D should not be applied automatically without considering the specific facts of the case.The Tribunal directed the AO to compute the disallowance by considering only those investments that yielded exempt income during the year, in line with the decision of the Delhi Tribunal (Special Bench) in ACIT Vs. Vireet Investment (P.) Ltd.Conclusion:- For Assessment Year (AY) 2011-12, the Tribunal partly allowed the appeal, directing that the STCG be treated as capital gains and the disallowance under Section 14A be recalculated.- For AY 2012-13, the Tribunal allowed the appeal, directing that the Short-Term Capital Loss be treated under the head Capital Gains.Order Pronounced: The appeals were concluded with the Tribunal's order pronounced on 06th June 2019.