2016 (4) TMI 903 - AT - Income Tax

Investment Company's Income from Share Sale via PMS: Capital Gains, Not Business Income

The Tribunal ruled that the income earned by the investment company on the sale of shares through Portfolio Management Services should be treated as ... Sale of shares as “business income” as against “short term capital gains” - Held that:- Investment through Portfolio Management Service, which may deal with the shares of the assessee so as to derive maximum profits cannot be termed as business of the assessee but would only be a case of a more careful and prudent mode of investment, which has been done by the assessee. Funds which lie with the assessee can always be invested (for earning higher returns) in the shares either directly or through professionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment, which is in shares, and the law permits it to be taxed as capital gains and not as business income. See CIT vs. Kapur Investments (P.) Ltd. [2015 (5) TMI 616 - KARNATAKA HIGH COURT ] - Decided in favour of assessee. Issues Involved:1. Whether the income earned by the assessee on the sale of shares should be considered as business income or capital gains.2. The treatment of income from investments through Portfolio Management Services (PMS).3. Alleged violation of principles of Natural Justice by CIT(A).4. Levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.5. Deduction of expenses incurred on Demat charges, Portfolio Management charges, and Security Transaction Tax.Issue-wise Detailed Analysis:1. Whether the income earned by the assessee on the sale of shares should be considered as business income or capital gains:The assessee, an investment company, filed its return of income declaring total income at Rs. 61,63,130/-. The Assessing Officer (AO) treated the income from the sale of shares as 'business income' rather than 'short term capital gains' as considered by the assessee. The CIT(A) upheld the AO's decision, noting that the shares were purchased in February and March 2007 and sold between April and December 2007. The CIT(A) observed that the frequent and numerous transactions indicated a business activity rather than an investment activity. The CIT(A) also noted that the assessee treated shares purchased during FY 2007-08 as stock in trade and offered the resultant income as business income, further supporting the conclusion that the transactions were business activities.2. The treatment of income from investments through Portfolio Management Services (PMS):The CIT(A) held that the income from PMS activities should be treated as business income, relying on the decision of the ITAT in Radials International vs. ACIT. The CIT(A) reasoned that the frequent transactions and organized activity indicated a business activity. However, the assessee argued that the decision of the Delhi Bench of the Tribunal in Radials International had been reversed by the Delhi High Court, which held that investment through PMS could not be termed as business activity. The Karnataka High Court in CIT vs. Kapur Investments (P.) Ltd. also supported this view, stating that investment through PMS is a prudent mode of investment and should be taxed as capital gains, not business income.3. Alleged violation of principles of Natural Justice by CIT(A):The assessee contended that the CIT(A) violated the principles of Natural Justice by dismissing the claim without considering the material on record and submissions made during the assessment proceedings. However, this issue was not elaborated upon in the judgment, and the primary focus remained on the classification of income from the sale of shares and PMS activities.4. Levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act:The assessee challenged the levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act. However, this issue was not discussed in detail in the judgment, as the primary contention revolved around the classification of income.5. Deduction of expenses incurred on Demat charges, Portfolio Management charges, and Security Transaction Tax:The assessee raised an additional ground for the deduction of Rs. 2,75,116/- incurred on Demat charges, Portfolio Management charges, and Security Transaction Tax while computing income earned on business of trading in shares/securities. This issue was not separately addressed in the judgment, as the main issue was the classification of income from the sale of shares and PMS activities.Conclusion:The Tribunal, after considering the submissions and material on record, concluded that the profits earned by the assessee on the sale of shares through PMS should be treated as capital gains and not as business income. The Tribunal relied on the decisions of the Delhi High Court in Radials International and the Karnataka High Court in CIT vs. Kapur Investments (P.) Ltd., which held that investment through PMS is a prudent mode of investment and should be taxed as capital gains. Consequently, the appeal of the assessee was allowed, and the income from the sale of shares was to be treated as capital gains. The order was pronounced in open court on 08-04-2016.