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2013 (11) TMI 1660 - AT - Income TaxNature of income - business income or capital gain - Held that - As in the PMS there was no assured guarantee against the loss or degeneration of capital as per the SEBI guidelines the portfolio manager was authorised to purchase and sale of shares on behalf of the client against the securities after obtaining the written permission that the portfolio managers were not authorised to undertake purchase/sale of securities that were settled otherwise then by actual delivery of transfer of securities that they could make investment at their own discretion that the investment made by the assessee through PMS was meant for maximisation of wealth and not with a view to purchase/sale of shares that department had not disputed the fact that portfolio managers had the sale and absolute discretion to make investment for and on behalf of the assessee that assessee had no role to play with regard to making of investment, that the very nature of PMS was that the investment made by the assessee could not be said to be scheme of trading of shares and stock that the profit was to be assessed under the head Capital Gains. Considering the above we are of the opinion that FAA was not justified in holding that share transactions carried out by the assessee through PMS was taxable under the head Business.
Issues:
1. Tax treatment of capital gains from sale of equity shares through Portfolio Management Services. 2. Charging of interest under sections 234B and 234C of the Income Tax Act. Analysis: Issue 1: Tax treatment of capital gains from sale of equity shares through Portfolio Management Services The appellant challenged the order of the Commissioner of Income Tax (Appeals) confirming the addition of capital gains as "Profit and Gains of Business or Profession." The Assessing Officer held that the appellant's activities in trading shares through Portfolio Management Services (PMS) indicated a business motive rather than investment intent. The AO concluded that the appellant's share transactions constituted a business activity, and thus, the profits should be treated as business income. The First Appellate Authority (FAA) upheld the AO's decision, directing that all gains from short-term or long-term capital gains be treated as business income. The FAA considered the PMS manager as an agent of the appellant, engaging in trading activities on her behalf, and charged commission for the same. The FAA rejected the application of sections 10(38) and 111-A to the profits derived from PMS. During the appeal before the ITAT, the Authorized Representative argued that the investment was made through portfolio managers, and the basic elements of a business were absent in the transactions. The ITAT, after considering relevant precedents, including the decision in Manan Nalin Shah, held that the profits from share transactions through PMS should be assessed as capital gains, not business income. The ITAT found that the PMS did not guarantee against capital loss, and the investment was aimed at wealth maximization, not trading. Therefore, the ITAT concluded that the FAA was incorrect in taxing the share transactions as business income. Issue 2: Charging of interest under sections 234B and 234C of the Income Tax Act The appellant also contested the charging of interest under sections 234B and 234C of the Income Tax Act. The ITAT considered this issue as consequential and allowed it for statistical purposes. Additionally, the appellant raised legal concerns regarding the FAA's decision to disallow the claim of short-term and long-term capital gains under section 10(38) without providing a prior notice or hearing. The ITAT found a violation of principles of natural justice in the FAA's directions to the AO, leading to an increase in the appellant's income. Consequently, the ITAT reversed the FAA's order on this issue, holding that the appellant was entitled to relief. In conclusion, the ITAT allowed the appeal filed by the appellant, reversing the FAA's decision and providing relief on the additional grounds raised regarding the tax treatment of capital gains and the charging of interest under sections 234B and 234C of the Income Tax Act.
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