2010 (9) TMI 492 - AT - Income Tax

Capital gain vs. Business income - 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 - assessee is a NRI and as such not allowed to trade in shares in view of the RBI regulations - in the earlier years also share income was held be on account of capital gains - 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 PE in India - 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. . An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. - This shall not apply if such broker or agent carries on in that other State an activity descripted in paragraph 4 wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises which are controlled by or have a controlling interest in it. Father of assesssee - 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. - Decided in favor of assessee.

Summary

Issues Involved:
1. Classification of income from share transactions as 'Capital Gains' or 'Business Income.'
2. Determination of whether the assessee's father constitutes an agency Permanent Establishment (P.E.) in India.
3. Determination of whether M/s Sushil Finance Consultants Ltd. constitutes a fixed P.E. under the India-Thailand DTAA.

Issue-Wise Detailed Analysis:

1. Classification of Income from Share Transactions as 'Capital Gains' or 'Business Income':
The primary issue was whether the profit arising from the purchase and sale of shares should be assessed as 'Capital Gains' or 'Business Income.' The Assessing Officer (AO) observed that the assessee engaged in substantial and frequent share transactions resulting in capital gains of approximately Rs. 1.47 crores and argued that these should be assessed as 'Business Income.' The assessee, an NRI based in Thailand, contended that the investments were made under the "Portfolio Investment Scheme" and were intended for earning dividends, not for trading. The CIT(A) found that the assessee's investments were made with surplus funds from his jewelry business and were reflected as investments in the balance sheet. The CIT(A) concluded that the profits from these transactions should be assessed under the head 'Capital Gains,' considering the nature of the transactions, the intention behind the investments, and the regulatory restrictions on NRIs.

2. Determination of Whether the Assessee's Father Constitutes an Agency P.E. in India:
The AO argued that the assessee's father, who held a general power of attorney, constituted an agency P.E. in India. The AO noted that the father had the authority to manage the business and execute contracts on behalf of the assessee. However, the CIT(A) found that the father did not habitually exercise this authority, and there was no evidence of organized business activity conducted by him. The CIT(A) emphasized that merely having an authority does not constitute a P.E. unless it is habitually exercised. The Tribunal agreed with the CIT(A), noting that the father occasionally signed cheques but did not actively manage the share transactions, and thus did not constitute an agency P.E.

3. Determination of Whether M/s Sushil Finance Consultants Ltd. Constitutes a Fixed P.E. Under the India-Thailand DTAA:
The AO also argued that M/s Sushil Finance Consultants Ltd., the broker handling the assessee's share transactions, constituted a fixed P.E. The AO noted that the broker tracked daily price movements and advised the assessee, suggesting a fixed place of business. However, the CIT(A) found that the broker's role was limited to providing advisory services and executing transactions based on the assessee's instructions. The CIT(A) concluded that the broker did not constitute a fixed P.E. since the assessee did not have a fixed place of business at the broker's office. The Tribunal upheld this view, emphasizing that the broker's advisory role and the absence of a fixed place of business at the broker's office did not meet the criteria for a fixed P.E. under the DTAA.

Conclusion:
The Tribunal dismissed the revenue's appeals, confirming the CIT(A)'s findings that the profits from the share transactions should be assessed as 'Capital Gains' and that neither the assessee's father nor the broker constituted a P.E. in India. The judgment emphasized the importance of the nature of transactions, the intention behind investments, and regulatory restrictions in determining the classification of income and the existence of a P.E.