2010 (3) TMI 1193 - AT - Income Tax

Summary

Issues Involved:
1. Classification of surplus from the sale of mutual fund units as "capital gains" or "business income".
2. Grant of credit for Security Transaction Tax (STT) paid.

Summary:

Issue 1: Classification of Surplus from Sale of Mutual Fund Units

This appeal by the revenue challenges the order of the CIT(A)-XXI, New Delhi, for the assessment year 2006-07, where the CIT(A) treated the surplus of Rs. 58,71,144/- from the sale of mutual fund units as "capital gains" instead of "business income". The Assistant Commissioner of Income-tax had initially assessed this surplus as business income u/s 143(3) of the Income-tax Act.

The CIT(A) considered nine factors to conclude that the surplus should be treated as capital gains, including the use of own funds, lack of infrastructure, consistent treatment of mutual funds as investments, and the non-transferable nature of mutual fund units. The CIT(A) also noted that units of mutual funds are recognized as approved investments u/s 11(5) of the Act.

The revenue argued that the assessee's main business is investing in shares and securities, and the surplus from mutual fund units should also be treated as business income. The revenue highlighted the regular and continuous activity in the investment of units and the intention to earn profit from these investments.

Upon review, the Tribunal considered various factors, including the assessee's lack of borrowing, payment of management fees to two companies, and the classification of units as investments in the books of account. The Tribunal found that the substantial activity in the sale/redemption of units and the acceptance of surplus from shares as business income weighed against the assessee. The Tribunal also noted that the AO did not ascertain the motive behind the subscription to the units and that the classification of assets in the balance sheet was inconsequential.

Based on the substantial nature of transactions and the lack of evidence supporting the assessee's claim that units were held as investments, the Tribunal held that the CIT(A) erred in treating the surplus as capital gains. The order of the CIT(A) was reversed, and the AO's assessment of the surplus as business income was restored.

Issue 2: Grant of Credit for Security Transaction Tax (STT) Paid

The assessee argued that if the surplus is taxed as business profits, credit for the STT paid should be granted. The CIT(A) did not decide on this issue as the transactions were initially treated as capital gains. Since the decision has been reversed, the matter of granting credit for STT is restored to the AO to allow deduction as per law.

Conclusion:

The appeal of the revenue is allowed, subject to the grant of credit for the STT paid as per law on transactions of the units. The order was pronounced in the open court on 31 March, 2010.