2011 (12) TMI 254 - AT - Income Tax

Sale/Purchase of Share - Capital Gain OR Business Income - Assessee invested under Portfolio Management Scheme - Quantity share traded is huge - Motive to earn profit - Trading through DEMAT account on delivery based - Held That - Simply because the assessee treated the deposits made under PMS as investments and balance shares lying in DEMAT account as on the last day of the accounting year under the head investment would not change the character of trading done by the portfolio manager on behalf of the assessee. When the shares are treated as Business Income question of exemptions under 10(38) do not arise. Principle of res-judicata not applicable to Income tax - Held That - Since in preceding A/Y such income was treated as Capital Gain is no bar to treat the same as Profit or Gains of Business Profession .

Issues Involved:
1. Nature of transactions under Portfolio Management Scheme (PMS) - whether they are an adventure in the nature of trade or a sale of investments.
2. Classification of gains/losses from sale of equity shares under PMS - whether they should be treated as business income or capital gains.
3. Applicability of Section 10(38) exemption on long-term capital gains from sale of equity shares under PMS.
4. Applicability of concessional tax rate under Section 111-A on short-term capital gains from sale of equity shares under PMS.
5. Initiation of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income.
6. Charging of interest under Sections 234-B and 234-D.

Detailed Analysis:

1. Nature of Transactions under PMS:
The primary issue was whether transactions involving the sale and purchase of shares under PMS are an adventure in the nature of trade or a sale of investments. The assessee argued that the investments were made with surplus funds and intended to earn dividends, not for trading. However, the assessing officer and the CIT (Appeals) concluded that the transactions were in the nature of trade. The shares were frequently bought and sold within short periods, indicating a motive to earn profits rather than to hold for dividends. The CIT (Appeals) noted that the transactions were systematic and organized, involving numerous trades, which is indicative of trading activity rather than investment.

2. Classification of Gains/Losses:
The assessee contended that the gains from the sale of shares should be treated as capital gains. However, the CIT (Appeals) and the Tribunal found that the transactions under PMS were managed by portfolio managers who acted as agents, frequently buying and selling shares to maximize profits. The Tribunal emphasized that the nature of the transactions, frequency, and volume indicated that the activities were trading in nature. Consequently, the profits arising from these transactions were classified as business income.

3. Applicability of Section 10(38) Exemption:
Since the Tribunal upheld that the transactions were in the nature of business, the profits could not be considered as long-term capital gains, and thus, the exemption under Section 10(38) was not applicable. The CIT (Appeals) had correctly disallowed the exemption on the grounds that the shares were traded rather than held as investments.

4. Applicability of Section 111-A Concessional Rate:
The assessee's claim for a concessional tax rate of 10% under Section 111-A on short-term capital gains was also rejected. The Tribunal held that since the profits were classified as business income, the provisions of Section 111-A, which apply to short-term capital gains, were not applicable.

5. Penalty under Section 271(1)(c):
The issue of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income was raised, but the Tribunal did not provide a detailed analysis on this matter in the judgment. The primary focus was on the classification of income and the applicability of exemptions and concessional rates.

6. Charging of Interest under Sections 234-B and 234-D:
The Tribunal concluded that the charging of interest under Sections 234-B and 234-D is mandatory and consequential to the additions made. Therefore, the assessing officer was directed to charge interest accordingly after giving effect to the Tribunal's order.

Conclusion:
The appeal filed by the assessee was dismissed. The Tribunal upheld the CIT (Appeals)'s decision that the transactions under PMS were in the nature of trade, and the resulting profits were business income. Consequently, the exemptions under Section 10(38) and concessional rates under Section 111-A were not applicable. Interest under Sections 234-B and 234-D was to be charged as per the additions made.

← Previous Next →