2018 (4) TMI 1670 - AT - Income Tax

Share Transactions via Portfolio Management Services: Tribunal Rules in Favor of Capital Gains Classification

The Tribunal dismissed the Revenue's appeal, affirming that gains from share transactions through Portfolio Management Services should be classified as ... Gains earned from share transactions engaging PMS [Portfolio Management Service] - characterization of income - correct head of income - capital gain or busniss income - HELD THAT:- As decided in YUSMARG INVESTMENT & TRADING PVT. LTD., VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE – 7, PUNE AND VICE-VERSA [2017 (5) TMI 1666 - ITAT PUNE] we confirm the order of CIT(A) holding the activity of purchase and sale of shares by engaging PMS constitutes an investment activity and the resultant gain/loss is assessable under the head capital gains. The ground raised by the Revenue is dismissed. Disallowance u/s 14A r.w.r.8D - non recording of satisfaction by AO before resorting to quantification of disallowance u/s.14A - assessee disallowed the entire PMS fee - HELD THAT:- AO has not recorded the satisfaction of any kind before resorting to quantification of disallowance u/s.14A r.w. Rule 8D of the I.T. Rules, 1961. It is settled legal proposition that the AO is under obligation to give a satisfaction in writing having regard to the books of account of the assessee, before rejecting the assessee’s claim of quantification of disallowable expenditure relatable to the earning of exempt income. In this case, assessee disallowed the entire PMS fee – the only expenditure incurred by him for earning of the exempt income. Without giving any satisfaction and reasons AO rejected the same before applying the said provisions and disallowing. In our view, this kind of approach of the AO is unsustainable in law. Thus disallowance made by the AO is required to be deleted in the absence of any satisfaction recorded by him while making disallowance u/s.14A of the Act. See CAPGEMINI TECHNOLOGY SERVICES INDIA LIMITED, VERSUS THE DY. COMMISSIONER OF INCOME TAX, AND VICE-VERSA [2018 (3) TMI 540 - ITAT PUNE] - Decided in favour of assessee. Issues Involved:1. Classification of gains from share transactions as 'business income' vs. 'capital gains'.2. Disallowance under Section 14A of the Income Tax Act.Issue-Wise Detailed Analysis:1. Classification of Gains from Share Transactions:The primary issue addressed by the Tribunal was whether the gains from the purchase and sale of shares through Portfolio Management Services (PMS) should be classified as 'business income' or 'capital gains'. The Revenue argued that these transactions should be treated as 'business income', while the assessee contended that they were 'capital gains'.The Tribunal noted that the assessee had engaged the services of a Portfolio Manager to manage its investments and generate income from the sale of shares. The assessee relied on several precedents, including the Pune Bench Tribunal's decisions in the cases of KRA Holding & Trading Pvt. Ltd. and Shri Apoorva Patni, which had treated similar gains as 'capital gains'. Additionally, the Tribunal referenced the CBDT Circular No.04/2007 and the judgment of the Bombay High Court in CIT Vs. Gopal Purohit, which supported the assessee's position.The Tribunal concluded that the activity of engaging PMS for share transactions was an investment activity aimed at wealth maximization rather than profit maximization. It emphasized that the volume and frequency of transactions alone do not determine the nature of the income. The Tribunal also noted that the assessee's transactions through PMS did not involve speculative trading or day trading, further supporting the classification as 'capital gains'. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this ground.2. Disallowance under Section 14A:The second issue pertained to the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The AO had disallowed Rs. 14,98,985/- as expenditure incurred to earn exempt income without recording any satisfaction regarding the applicability of these provisions.The Tribunal examined the AO's assessment order and found that the AO had not recorded any satisfaction before making the disallowance under Section 14A. It emphasized that it is a settled legal proposition that the AO must provide a written satisfaction, having regard to the assessee's books of account, before rejecting the assessee's claim of disallowable expenditure. The Tribunal cited various precedents, including the Supreme Court's decision in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, which underscored the necessity of recording satisfaction.The Tribunal further referenced the Pune Bench Tribunal's decisions in the cases of Capgemini Technology Services India Limited and Poonawalla Investment & Industries Pvt. Ltd., which had similarly held that the absence of recorded satisfaction by the AO rendered the disallowance under Section 14A unsustainable.In conclusion, the Tribunal found that the AO had failed to record the necessary satisfaction before invoking the provisions of Section 14A. As a result, the disallowance made by the AO was deemed unsustainable, and the Tribunal allowed the assessee's cross-objection on this ground.Summary of Judgments:- The appeal filed by the Revenue was dismissed, affirming that the gains from share transactions through PMS should be classified as 'capital gains'.- The cross-objection filed by the assessee was allowed, and the disallowance under Section 14A was deleted due to the AO's failure to record the required satisfaction.Order Pronouncement:The order was pronounced in the open court on April 18, 2018.