2012 (9) TMI 1028 - AT - Income Tax

Activity of transacting in shares/mutual funds by engaging a Portfolio Management Service - capital gains OR business income - Held that - The Investment Objective of the assessee mandated to the PMS provider was to achieve growth prospects and the actuality of transactions carried out by the PMS provider in order to achieve the stated Investment objective of the assessee cannot be made a basis to charge the assessee of having a different objective. Considering the aforesaid matters, we, therefore, are of the view that the objections made out by the Assessing Officer have been adequately addressed by the Commissioner of Income-tax (Appeals) in coming to his findings that the investments carried out by the assessee through the PMS provider do not result in a gain assessable as business income. Addition u/s 14A - Held that - CIT(A) has given a categorical finding that expenditure on PMS has not been claimed by the assessee and there does not remain any other expenditure other than this expenditure, therefore, no disallowance u/s.14A r.w. Rule8D can be made. The above factual finding given by the learned CIT(A) could not be controverted by the learned DR. Under these circumstances, we hold that the learned CIT(A) was justified in deleting the disallowance made by the AO.

Summary

Issues Involved:

1. Classification of gains from Portfolio Management Services (PMS) as capital gains or business income.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Issue-Wise Detailed Analysis:

1. Classification of Gains from PMS:

The primary issue in these appeals is whether the gains from transactions in shares and mutual funds through Portfolio Management Services (PMS) should be classified as capital gains or business income. The Assessing Officer (AO) treated these gains as business income based on the previous assessment year (2007-08) where it was held that such gains were business profits. This was done despite the fact that the appeal for the previous year was still pending. The AO also allowed the deduction of related expenses, including PMS fees, and computed the taxable income under the head "income from business."

The Commissioner of Income Tax (Appeals) [CIT(A)], however, followed the order of his predecessor for A.Y. 2007-08, which classified the gains from PMS as capital gains, and allowed the assessee's claim. The revenue appealed against this decision.

Upon hearing both sides, the Tribunal found that an identical issue had been decided in favor of the assessee in the case of Apoorva A. Patni for A.Y. 2007-08. The Tribunal had previously ruled that the gains from PMS should be treated as capital gains, not business income. The Tribunal noted that the PMS provider had discretion over investment decisions, which were made to maximize wealth rather than to trade. This indicated an investment activity rather than a trading activity.

The Tribunal also addressed the AO's concerns about the volume and frequency of transactions, concluding that these factors did not alter the nature of the transactions as investments. The Tribunal found that the CIT(A) had correctly analyzed the facts and circumstances, including the nature of the PMS agreement and the investment objectives, and upheld the CIT(A)'s decision to classify the gains as capital gains.

2. Disallowance under Section 14A read with Rule 8D:

The second issue involved the disallowance of Rs. 5,57,396/- made by the AO under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The AO disallowed this amount, considering it as expenditure incurred for earning tax-free dividend income.

The CIT(A) deleted this disallowance, stating that disallowance under Section 14A requires a finding of actual expenditure incurred. Since the expenditure on PMS had not been claimed by the assessee, there was no other expenditure to be disallowed under Rule 8D. The revenue appealed against this decision.

The Tribunal found no infirmity in the CIT(A)'s order. The CIT(A) had given a categorical finding that the expenditure on PMS had not been claimed by the assessee, and thus, no disallowance under Section 14A read with Rule 8D could be made. The Tribunal upheld the CIT(A)'s decision, as the revenue could not provide any contrary material to dispute the CIT(A)'s findings.

Conclusion:

The Tribunal dismissed the revenue's appeals on both issues. It upheld the CIT(A)'s decision to classify the gains from PMS as capital gains and not business income. It also upheld the deletion of the disallowance made under Section 14A read with Rule 8D, as the expenditure on PMS had not been claimed by the assessee. Consequently, all the appeals filed by the revenue were dismissed.