TaxTMI 
TaxTMI 
2010 (9) TMI 492
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....fixed P.E as per India Thailand DTAA 3. Ground No.1: After hearing both the parties we find that during the assessment proceedings AO noticed that assessee has entered into substantial and frequent sale and purchases of shares which had resulted into capital gains of approximately Rs.1.47 crores. AO was of the view that sale and purchase transactions of the shares were to be assessed under the head 'business income' and, accordingly, issued a show cause notice. In response to the same, it was mainly argued that assessee was a NRI based in Thailand since 1983 and was engaged in full business of manufacture and export of jewellery. The surplus generated from such business was being invested in Indian shares, mainly by making application in the public issues i.e. IPO. It was further explained that from the earlier records it would be clear that assessee has never traded in shares. The assessee being a NRI was not permitted under the RBI regulations to trade in shares and only investment in shares was allowed and that too under the "Portfolio Investment Scheme". In these guidelines various restrictions like ....
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.... on the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Associated Industrial Development Co. (P). Ltd. [82 ITR 586]. He also referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. CIT vs. Associated Industrial Development Co. (P). Ltd. [supra], wherein whether transactions of sale and purchase of shares were involved it was observed that the nature of the investment was a mixed question of law and fact. He also reproduced the following observations of the Hon'ble Supreme Court in the case of CIT vs. Distributors of Baroda {P} Ltd. [83 ITR 377]: "We cannot say that the legislature did not know its own mind when it used that expression in s. 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression "business" is a well-known expression in income-tax law. It means, as observed by this Court in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC) : "some real, substa....
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....le of shares resulted in profit did not indicate that the purchase of shares was with intention to sell. (f) in CIT Vs. ESS Jay Enterprises (P) Ltd. [165 Taxmann 465 (Del.)] the gains were held to be in the nature of Capital Gains as the assessee had reflected the shares as "investments" in their Balance Sheet. (g) The Mumbai ITAT Bench `H' in the case of Janak S.Rangwala Vs. Assistant Commissioner of Income Tax, (11 SOT 627), it was held that the transactions in shares held as investments would give rise to capital gains, notwithstanding the high magnitude of transactions of shares. (h) In the case of ACIT Vs. B.N.Rathi Securities Ltd. [71 ITD 31 (Hyd)], the assessee company was engaged in the main business of hire purchase and leasing. Its investments in shares and securities were shown as investments in the balance sheet at cost. The Tribunal held that the assessee was not carrying on the business of share trading, as there was nothing on record to suggest that the company intended to trade in shares. (i) In the case of ACIT Vs. Krishna Kumar Bangur [(2004) 87 TTJ (Jd) 368 : 2005 1 SOT 189 (Jd)] the main source of income of the assessee was from salary dividend and interest.....
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....timately observed as under: "The appellant was constantly deploying his funds in India share market and upto Asst. Year 2004-05 the gains arisen were accepted by Department under the head capital gains. During the year also the pattern of transactions continued with increase in volume. Though the volume was high there was no borrowing for this purpose. The balance sheet reflects the transactions as investments. The appellant is an NRI is permitted to transact in shares subject to SEBI regulations as an investor and not as a trader. The appellant earned dividend from 108 companies to the tune of Rs. 5,78,694/-. The cross examination of the appellant's father in AY 2005-06 in the appellant's brother's case did not reveal that any organized business activity was carried on in India as regards shares. It is clear that though the power of attorney (POA) was general in nature, the appellant's father had issued only certain cheques as per the instruction of his son. Further, the authorized stock broker was functioning as an independent entity giving advice to clients at large of which the appellant was on....
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....ther hand, Ld. counsel of the assessee reiterated the submissions made before the lower authorities and particularly emphasized that the assessee was running full time business of manufacture and export of jewellery in Thailand and only surplus money from this business was invested in Indian share market and that too through public issues i.e. IPO. He further emphasized that RBI had clearly prohibited NRIs from trading in shares and only investment is permitted and that too under the "Portfolio Investment Scheme", under which certain ceiling has been placed and such purchase and sale can be carried out only through authorized dealers. The share broker is required to deduct tax on capital gains earned by such NRIs and even TDS in the case of the assessee amounting to Rs. 16,60,675/- has been deducted. He submitted that Advanced Authority of Ruling has already held in the case of Fidelity North Star Funds & Others In- Re [supra] that once FII is restricted under SEBI and SEBI condition does not allow share trading, then it cannot be said that income arising from such a situation on account of sale and purchase of shares, is to be treated as business income and such income has to be a....
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....as done out of the surplus funds, then it cannot be said that transactions were on account of trade. He submitted that this position has been confirmed by the Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit [228 CTR 582] wherein it was held that delivery based transactions should be generally held to be investment transactions and even though the principles of res judicata is not attracted, since each assessment year is separate in itself, there ought to be some uniformity in treatment and consistency when facts and circumstances are identical. 11. We have considered the rival submissions carefully and agree with the submissions of the Ld.counsel of the assessee. First of all assessee is already engaged in full time business of manufacture and sale of jewellery in Thailand and has invested only the surplus money in the Indian share market. It has not been denied that substantial portion of such money was invested through public issues i.e. IPO. Normally a trader in shares would not make application through IP0s and wait for sometime for allotment which is generally very long and then hold the shares and wait for ....
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....ch of imagination, be assumed as income arising from the transfer of such securities for the simple reason that such type of income is referred to in cl. (b) where the income is specified as being by way of short-term and long-term capital gains arising from the transfer of such securities. It was against deduction of expenditure such as by way of salary of the staff, etc., expenditure in obtaining loans and paying interest thereon that Parliament guarded, by providing in clause {a} of section 115AD(2) that no deduction shall be allowed in computing income in respect of securities referred in clause [a] of sub-section [1]. (c) The plethora of legislative provisions unmistakably pointed out that an FII was not registered for carrying on trade in securities; it could only invest in securities for the purpose of earning income by way of dividends and interest and realizing capital gains on their transfer. Trading in securities by a FII was prohibited. (d) It would be preposterous to impute an intention to FIIs, who responded to the offer of investment in securities in response to the guidelines, got themselves registered under the SEBI Regulations and undertook to abide by those regu....
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....tances are identical. In the case of the assessee in the earlier years also share income was held be on account of capital gains. Under these circumstances , we are of the view, that the ld. CIT(A) has correctly held that profits received by the assessee on account of sale and purchase of shares are to be treated as income from capital gains and accordingly we confirm his order. 14. Groun Nos. 2 & 3: Though once the income from the sale and purchase of shares is held to be income from capital gains these two grounds are only in the nature of academic issues and have become infructuous, but since both the parties have argued the issues we are adjudicating the same. 15. Once the income from sale and purchase of shares was held to be assessable as income from business by the AO then it was argued before him that in that case no tax at all can be charged because in the case of a NRI ass, income cannot be assessed under the head 'income from business' unless and until such an assessee has a permanent establishment i.e. PE in India in terms of Article 7 of Double Taxation Act [DTA] agreement....
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....ss of enterprise must be carried on through this place of business. AO again observed that since Mr. Amol Joshi was keeping track of daily price movement of the company on behalf of the assessee and all necessary work regarding share trading activity was done from office of M/s Sushil Finance Consultancy Ltd., therefore, the assessee's case would fall under Article 5(1) as M/s Sushil Finance Consultancy Ltd., would constitute his PE. 16. On appeal before the CIT[A], it was argued that AO has himself decided that one of the either i.e. father of the assessee Sri Sevantilal S. Shah, or the broker M/s Sushil Finance Consultancy Ltd., was the PE. This only indicates that AO himself was not clear whether assessee has a PE in India or not. It was further submitted that all the share transactions were done on the basis of the instructions given by the assessee and broker rendered only broking services. It was pointed out that Mr. Amol Joshi, Client Relationship Manager was also examined by Bombay Income Tax Office and the out come of the enquiry with him has been completely ignored. It was submitted that unless assessee has a fixed place at his disposal in the broker's office, it cannot ....
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....on by the appellant, I am convinced to hold that there is no factual or legal base to conclude that the appellant's father constituted agency P.E. or in the alternative the share broker constituted fixed place P.E. In short the appellant had no P.E. at all in India during the year ended 31-03-2006. Accordingly, ground Nos.2 and 3 succeed." 20. Before us, ld. DR submitted that it is not denied that assessee had given power of attorney to the father Shri Sevantilal S.Shah. Further assessee had never clarified that how the purchases orders were placed, how the payments were made and how the share transactions were managed. This would mean that all these activities were done through assessee's father only and, therefore, assessee's father being an agent of the assessee would constitute PE in terms of Article 5[4] of the DTAA between India and Thailand. 21. On the other hand, ld. counsel of the assessee reiterated the submissions made before the lower authorities. He also emphasized that with a view to ascertain the role of Mr. Amol Joshi, Client Relationship Manager of M/s Sushil Finance Consultancy Ltd., an enquiry was conducted on 22-12-2008 in which it was clearly clarified that a....
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....y case, we fail to understand that simply by stating that Mr. Amol Joshi was tracking the price movements of the shares and was advising the clients to make the share broker of the assessee as his PE. The movements in share prices can be monitored by anybody in the world by opening any commercial TV channel or internet services. As far as the advice is concerned, merely if broker is advising the client regarding certain shares, then it cannot be said that such broker is also taking business decisions on behalf of the assessee. No fixed place or exclusive person was provided for assessee to conduct his business. It has been observed by the Special Bench of the Tribunal in the case of Motorola Inc. vs. DCIT [supra], that simply because certain employees were allowed to visit the facilities locally, it cannot be said that assessee had at its disposal as a matter of right certain places which could be characterized as fixed place of business in terms of Article 5.1. It was also stated that portfolio investment services were provided to the assessee by BNP Paribas and under those guidelines o....
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....se of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of the preceding paragraphs a person (other than a broker, general commission agent or any other agent of an independent status to whom paragraph 5 applies) acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned Contracting State, if: (a) he has and habitually exercises in the first-mentioned Contracting State in authority to conclude contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to that enterprise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State wholly or almost wholly for the enterprise or for the enterprise and other enterprises which are controlled by it or have a controlli....
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....ctions in stock market relating to my son Samir. iv. Without prejudice to the generality of the above, I confirm that I have not bought or sold any shares on the stock market on behalf of my son Samir. v. Being one of the authorised signatory of Samir's Bank A/c. No.0011220003572 with HDFC Bank Ltd, Tulsiani Chambers, Nariman Point, Mumbai 400021. I have at times only signed cheques under instruction of my son Samir in favour of his share Brokers for the amounts instructed by my son Samir. vi. Whatever stated herein above is true and correct to the best of our knowledge belief and information and nothing has been concealed herein. From above averments it was made clear that assessee's father was 76 years old and was a retired person. He has not acted on behalf of the assessee. This has not been rebutted by the department. If AO had any material he should have called Mr. Sevantilal S. Shah and examined him. But nothing like that has been done to prove that assessee's father constituted PE. Occasionally he might have signed cheques and that itself would not construe him as PE of the assessee. As the ld. DR has referred to the question raised by the AO that how the payments were re....