Tribunal Partially Allows Appeal: Classifies Investment Gains as Capital Gains, Limits Disallowance u/s 14A.

Santosh Mohanlal Rathi Versus Dy. CIT, Circle-2, Pune

Santosh Mohanlal Rathi Versus Dy. CIT, Circle-2, Pune - TMI Issues Involved:
1. Classification of income from sale of shares as business income vs. capital gains.
2. Disallowance under Section 14A read with Rule 8D concerning exempt income.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:

The primary issue was whether the profit from the sale of shares should be classified as business income or capital gains. The assessee, an individual engaged in share trading and sub-broker activities, declared a capital gain of Rs. 90,47,345/-. The Assessing Officer (AO) argued that the assessee's regular engagement in the purchase and sale of shares indicated a profit motive, thereby classifying the income as business income. The AO noted that the assessee utilized borrowed funds for trading shares and did not intend to derive income by way of dividends but to earn profits on the sale of shares.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying on precedents from the Hon'ble Calcutta High Court in Jaijuria Bros Ltd. vs. CIT and the Hon'ble Delhi High Court in Manoj Kumar Samdaria vs. CIT, which classified frequent and high-volume share transactions as business income.

Before the Tribunal, the assessee contended that he maintained separate portfolios for investment and trading, with the intention of holding shares as investments. The assessee cited the Bombay High Court decision in CIT vs. Gopal Purohit, which held that delivery-based transactions should be treated as investments, and profits therefrom should be assessed as capital gains.

The Tribunal found that the assessee maintained two separate portfolios and consistently treated delivery-based transactions as investments. The Tribunal noted that the Revenue had accepted this treatment in earlier assessment years 2008-09 and 2009-10. Hence, the Tribunal concluded that the gains from the investment portfolio should be assessed as capital gains, setting aside the CIT(A)'s order.

2. Disallowance under Section 14A read with Rule 8D:

The second issue concerned the disallowance of expenses under Section 14A read with Rule 8D. The assessee earned a dividend income of Rs. 2,03,834/- and claimed exemption. The AO applied Rule 8D(2)(ii) for disallowance, resulting in a disallowance of Rs. 7,66,911/-, which was upheld by the CIT(A).

The assessee argued that no expenditure was incurred in earning the exempt income and that the disallowance should not exceed the exempt income. The Tribunal agreed, citing the Bombay High Court decision in M/s. Nirved Traders Pvt. Ltd. vs. DCIT, which held that disallowance under Section 14A read with Rule 8D cannot exceed the exempt income.

Consequently, the Tribunal restricted the disallowance to the extent of the exempt income of Rs. 2,03,834/-, modifying the CIT(A)'s order.

Conclusion:

The Tribunal allowed the assessee's appeal in part, concluding that:
- The gains from the investment portfolio should be assessed as capital gains.
- The disallowance under Section 14A read with Rule 8D should be restricted to the exempt income earned.

Order Pronounced on 9th December 2020.