2012 (9) TMI 793 - AT - Income Tax

Profit arising out of purchase and sale of shares as well as units of mutual fund through Portfolio Management Services - Business income or Capital Gains - AY 03-04 - assessee showed it as business income in return, however during the course of assessment proceedings, claimed it to be capital gains - whether head of income can be changed without filing of revised return - Held that - Merely because assessee claimed an income under the head business income but is to be assessed under the law under another head cannot be rejected only on the ground that no revised return has been filed. AO has to decide the assessability of income under correct head on the basis of the facts and as per provisions of I.T.Act. It is a legal ground and the same could be considered by CIT(A) on the basis of the facts and as per provisions of law. Non-filing of the revised return of income should not come in the way if all the relevant facts are available on record. On perusal of the contents of the agreement, it is observed that assessee has placed funds with PMS to make investment in shares/mutual funds and not with a view to do trade. Assessee also made direct investments in shares and there was short term capital gain and long term capital gain being accepted by department. Considering the scheme of Portfolio Management, it is observed that investments made by the assessee through PMS is meant for maximization of wealth and not with a view to do trade in purchase and sale of shares. Further, department has not disputed the fact that the Portfolio Manager have the sole and absolute discretion to make the investments for and on behalf of the assessee and the assessee has no role to play on the same. The assessee has not taken any borrowing for making investments for placing its funds with Portfolio Manager. Very nature of PMS is such that investments made by the assessee cannot be said to be scheme of trading of shares and stocks and, accordingly, the profit is to be assessed under the head capital gains - Decided in favor of assessee

Summary

Issues Involved:
1. Classification of income from Portfolio Management Scheme (PMS) as "capital gains" or "business income."
2. Disallowance of long-term capital loss on transfer of units of US-64.
3. Interest charged under sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

1. Classification of Income from PMS:
The primary issue across the appeals for the assessment years 2003-04, 2004-05, and 2005-06 was whether the income derived from PMS should be classified under "capital gains" or "business income."

- Assessment Year 2003-04:
- The assessee initially reported the income from PMS as "business income" but later contended it should be treated as "capital gains."
- The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected the assessee's claim, citing the Supreme Court decision in Goetze India Ltd vs CIT, which mandates filing a revised return for such claims.
- The Tribunal noted that the assessee had a history of treating investments in shares and mutual funds as capital assets, consistently accepted by the department.
- The Tribunal referred to the agreement with Kotak Securities, which indicated the intention to invest for wealth maximization, not trading.
- Citing various judicial precedents, including ITAT Pune and Mumbai decisions, the Tribunal concluded that investments through PMS should be treated as capital gains, not business income.

- Assessment Year 2004-05:
- The assessee appointed Prudential ICICI Asset Management Company Ltd. as an additional Portfolio Manager.
- The Tribunal reiterated its reasoning from the 2003-04 assessment, treating the income from PMS as capital gains.
- The Tribunal also acknowledged that the assessee had shown income from PMS as capital gains in the return for this year.

- Assessment Year 2005-06:
- The assessee appointed Kotak Fortune Equity as an additional Portfolio Manager.
- The Tribunal applied the same reasoning as in previous years, treating the income from PMS as capital gains.

2. Disallowance of Long-Term Capital Loss:
- Assessment Year 2004-05:
- The assessee claimed a long-term capital loss of Rs. 3,17,52,245 on the transfer of units of US-64.
- The CIT(A) disallowed the claim, stating that the income from US-64 was exempt under section 10(33), making the loss notional.
- The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

3. Interest Charged Under Sections 234B and 234C:
- Assessment Years 2004-05 and 2005-06:
- The Tribunal noted that the interest charged under sections 234B and 234C is consequential and does not require specific adjudication.

Conclusion:
The Tribunal concluded that the income derived from PMS should be classified as "capital gains" and not "business income" for the assessment years 2003-04, 2004-05, and 2005-06. The disallowance of the long-term capital loss on US-64 units was dismissed as not pressed, and the interest charged under sections 234B and 234C was deemed consequential. The appeals were allowed in part, directing the AO to take the correct amount of income from PMS as per the evidence provided by the assessee.