2024 (1) TMI 761 - HC - Income Tax

Mutual fund gains treated as capital gains not business income based on investment intent analysis

Pr. Commissioner of Income Tax- 18 Versus M/s. WIG Investment

Delhi HC upheld Tribunal's decision treating mutual fund gains as capital gains rather than business income. Court held that determining investment versus ... Correct head of income - gain made by assessee on redemption of mutual funds should have been treated as business income, not short-term capital gain - whether the transactions carried out by the respondent/assessee concerning mutual funds were in the nature of ‘investment’ or ‘stock-in-trade’, is an aspect which is fact-centric, juxtaposed with the law enunciated qua like transactions? - HELD THAT:- What the adjudicating authority has to discern is the intent of the assessee. The intent has to be ascertained keeping in mind the magnitude and frequency of the transactions, the period for which shares are held, the purpose for which they are held, and how transactions are disclosed in the books of account. There is no presumption in law that the acquisition of shares by an assessee is necessarily for trade as against investment. CIT(A) and the Tribunal, after appreciating the material on record, have concluded that the transactions concerning mutual funds were in the nature of investment and not motivated by trade. In this context, the CIT(A) and the Tribunal, among other things, looked at the transactions from the following prism: quantum of trade, value, purpose, the period for which mutual funds were held, and how disclosure had been made in the books of accounts/financial statements. For the sake of brevity, we are not setting forth the findings returned on the said aspects by these statutory authorities once again. Reference in this regard has been made in the paragraphs above. None of these findings have been assailed before us as being perverse. Concededly, revenue has not proposed a question that the findings returned by the Tribunal concerning the aforementioned aspects were perverse as they were not based on the material placed on record. Appreciation of material/evidence placed before the statutory authorities cannot form a subject matter of appeal under Section 260A of the Act unless the Court were to conclude that the findings were perverse or were returned without evaluating the relevant material on record - no substantial question of law arises Capital contribution received by assessee should be taxed in its hands as deemed dividend under the provisions of Section 2(22)(e) - As would be apparent from the facts, in the instant case, the two companies, i.e., KPFSE and KICIPL, had made capital contributions to the respondent/assessee. Since no money had been loaned or advanced to the respondent/assessee, both the CIT(A) and the Tribunal came to a conclusion, as noticed above, that if at all, the additions could be made only in the hands of the individual partners, after affording them an opportunity of hearing. The capital contribution on a plain reading of the section cannot be treated as a 'loan' or 'advance'. Since the findings of fact returned are that KPFSE and KICIPL had contributed capital and not extended any loan or advance to the respondent/assessee and that the respondent/assessee was neither a registered shareholder nor a beneficial owner of shares held in KPFSE and KICIPL, as rightly held by the Tribunal and CIT(A), the addition could not have been made in the hands of the respondent/assessee. As correctly observed, if at all, the addition could be made in the hands of the two individuals, i.e., Mr Pradeep Wig and Mrs Neera Wig, and that too only by the AO of the two individuals, albeit after affording them an opportunity of hearing. Furthermore, in our view, the Tribunal has rightly concluded that it could not treat the observations made by the CIT(A) as a direction under Section 150(1) of the Act. As observed above, the addition, if at all in the hands of Mr Pradeep Wig and Mrs Neera Wig, could only be made by their AO after giving them a chance to defend themselves. Thus we are unable to persuade ourselves that the impugned order passed by the Tribunal requires interference - no substantial question of law arises for our consideration. Issues Involved:1. Nature of gains from redemption of mutual funds (investment vs. business income).2. Taxability of capital contributions as deemed dividends under Section 2(22)(e) of the Income-tax Act, 1961.Summary:Issue 1: Nature of Gains from Redemption of Mutual FundsThe CIT(A) and the Tribunal concluded that the transactions concerning mutual funds were in the nature of investment and not motivated by trade. The CIT(A) found that the respondent/assessee had not engaged in frequent transactions, had invested in mutual funds from its own resources, and had shown the transactions as investments in its balance sheet. Consequently, the Tribunal upheld the CIT(A)'s decision to treat the gains derived from mutual funds as capital gains and not business income. The Tribunal's findings were based on the evidence and material on record, and no substantial question of law arose from this issue.Issue 2: Taxability of Capital Contributions as Deemed DividendsThe CIT(A) and the Tribunal held that the capital contributions made by KPFSE and KICIPL to the respondent/assessee could not be treated as loans or advances and, therefore, could not be taxed as deemed dividends under Section 2(22)(e) of the Act. The Tribunal emphasized that the respondent/assessee was neither a registered shareholder nor a beneficial owner of shares in KPFSE and KICIPL. The Tribunal also noted that any addition under Section 2(22)(e) could only be made in the hands of the individual shareholders, Mr. Pradeep Wig and Mrs. Neera Wig, after giving them an opportunity of hearing. The Tribunal's findings were based on the facts and circumstances of the case, and no substantial question of law arose from this issue.Conclusion:The High Court concluded that no substantial question of law arose for consideration and upheld the Tribunal's order in totality, disposing of the appeal accordingly.