2018 (6) TMI 1275 - AT - Income Tax

Sale of Securities via Portfolio Management Services: Capital Gains vs. Business Income ruling upheld

The Tribunal concluded that gains from the sale of securities through Portfolio Management Services (PMS) should be treated as 'Capital Gains' and not ... Chargeability of gains earned on sale of securities under the head ‘Capital Gains’ or ‘Business Income’ - Port Folio Management Services are availed by the assessee in earning such gains - Held that:- The volume and frequency of transactions sought to be made out by the Assessing Officer with regard to the impugned activity stands on an entirely different footing and is quite distinct from the activity of trading in shares carried out by the assessee. In fact, it is notable that in the share trading business carried on by the assessee, he has carried out certain speculative and trading activities and that in the case of a PMS provider, such activities are prohibited in law. Having regard to the aforesaid discussion by the Commissioner of Income-tax (Appeals), which is borne out of the record, we, therefore, find no reasons to uphold the plea of the Assessing Officer on the basis of the volume and frequency of transactions. It is undisputed that the assessee has been consistently employing the services of PMS – Kotak Securities Ltd. for augmenting the value of securities and the same are shown under the head ‘Capital Gains’. The pattern of investment is one and the same in this year also. Assessing Officer disturbed the assessee’s claim by treating the said income as taxable under the head ‘Profits and Gains from Business or Profession’. On similar facts, relying on the Pune Bench decision in the case of Shri Apoorva Patni Vs. Addl.CIT [2012 (9) TMI 828 - ITAT, PUNE], the CIT(A) granted relief to the assessee by holding that when the income earned by the assessee out of investments in securities using specialized professional services of PMS – Kotak Securities Ltd., such income becomes taxable under the head ‘Capital Gains’ and the same should not be construed as ‘Business Income’. - Decided against revenue Issues Involved:1. Chargeability of gains earned on the sale of securities under the head 'Capital Gains' or 'Business Income' when Portfolio Management Services (PMS) are availed by the assessee.Detailed Analysis:1. Chargeability of Gains Earned on Sale of Securities:Facts and Background:The appeals concern the assessment years 2008-09 to 2012-13. The core issue is whether the gains from the sale of securities through PMS should be treated as 'Capital Gains' or 'Business Income'. The CIT(A) allowed the assessee's claim of treating the gains as 'Capital Gains', which the Assessing Officer (AO) had treated as 'Business Income'.Arguments by the Revenue:The Revenue argued that the assessee's transactions in shares and mutual funds through PMS were conducted in a very organized manner with the intention to maximize profit through frequent trading, rather than holding shares for a long duration. This, according to the Revenue, indicated a business activity.Arguments by the Assessee:The assessee contended that the investments were made to augment wealth and were managed by a PMS due to the assessee's lack of expertise in investments. The assessee emphasized that the nature of the transactions and the intention behind them were to hold investments for long-term growth, not for trading. The assessee also cited previous assessments where similar transactions were treated as 'Capital Gains'.CIT(A) Observations:The CIT(A) found merit in the assessee's arguments, noting that the AO had not adequately considered the nature and intention behind the transactions. The CIT(A) referred to several judicial precedents, including decisions by the Hon'ble Supreme Court and the Bombay High Court, which supported the treatment of gains from PMS as 'Capital Gains'. The CIT(A) highlighted that the PMS operated in a fiduciary capacity, making investment decisions independently of the assessee, which aligned with the nature of capital investments rather than business activities.Tribunal's Analysis:The Tribunal upheld the CIT(A)'s decision, emphasizing the following points:- The nature of Discretionary Portfolio Management Services (PMS) involves the PMS provider making independent investment decisions aimed at wealth maximization, not profit maximization through trading.- The volume and frequency of transactions alone do not determine the nature of income; the intention behind the transactions and the manner in which they are conducted are crucial.- The Tribunal referred to its previous decision in the case of Shri Apoorva Patni, where it was held that gains from investments managed by a PMS should be treated as 'Capital Gains'.Conclusion:The Tribunal concluded that the gains from the sale of securities through PMS should be treated as 'Capital Gains' and not 'Business Income'. The appeals by the Revenue were dismissed, and the CIT(A)'s order was upheld.Order:All five appeals by the Revenue were dismissed, and the gains from the sale of securities through PMS were confirmed to be chargeable under the head 'Capital Gains'. The order was pronounced on June 20, 2018.