2014 (4) TMI 534 - HC - Income Tax

Assessability of Income from sale of Mutual funds Mutual funds are not tradable Whether the ITAT was legally justified in holding that the income on sale of Tata Mutual Funds (dividend plan) are assessable as income from Short Term Capital Gain Held that - The assessee is not a business entity in the nature of a manufacturing unit or marketing concern which, making departure from its normal business or marketing activities, had acquired a capital asset as distinguished from business asset - making investment to raise a capital asset would definitely be not in the nature of stock-in-trade and such transaction would also not be a venture in the nature of trade - the assessee is engaged in the trade of sale and purchase of equity shares, securities and debentures etc. - The transaction is no different from the others entered into by the assessee in the regular course of its business and in the usual discharge of its functions by its employees - by no means the deposit can be taken to be distinct or different from other transactions carried out by the assessee - The deposit was clearly made by the assessee to earn profits on its deposit and thus, was in the nature of stock-intrade and the revenue generated to the extent of Rs.1,24,70,700/- is to be assessed as business income. The CIT(A) as also the ITAT were wrong in adjudicating the income on sale of Tata Mutual Funds (Dividend Plan) as income from short term capital gains merely on the ground that the units of mutual funds were not freely tradable and thus, such investment was in non-tradable commodity - it has been amply proved that the business of the assessee is to make profits by virtue of investments in shares and securities etc. - Merely because there is single transaction or that such investment was in not freely tradable commodity, does not change the profit intent of the assessee who is in the business of investments only - the investment made by the assessee was rightly treated as stock-in- trade and revenue generated was correctly assessed as business income by the AO Decided in favour of Assessee.

Issues Involved:
1. Nature of Income: Whether the income from the sale of Tata Mutual Funds (Dividend Plan) should be classified as business income or short-term capital gains.
2. Treatment of Investment: Whether the investment in Tata Mutual Funds should be treated as stock-in-trade or as a capital investment.
3. Consistency in Accounting: Whether the principle of consistency in accounting treatment should favor the assessee.
4. Intention and Conduct: The intention of the assessee at the time of making the investment and its subsequent conduct.

Detailed Analysis:

1. Nature of Income:
The primary issue in this case is whether the income from the sale of Tata Mutual Funds (Dividend Plan) should be classified as business income or as short-term capital gains. The Assessing Officer (AO) treated the income as business income, arguing that the assessee redeemed the investment to earn more profits rather than holding it for dividends. The Commissioner of Income Tax (Appeal) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) disagreed, treating the income as short-term capital gains. However, the High Court concluded that the income should be classified as business income, emphasizing that the assessee's usual business involved trading in shares and securities, and the investment was part of this regular business activity.

2. Treatment of Investment:
The AO argued that the investment in Tata Mutual Funds should be treated as stock-in-trade, as the assessee did not intend to hold it for a long period and redeemed it for profit. The CIT(A) and ITAT treated it as a capital investment. The High Court, however, found that the investment was made in the usual course of the assessee's business, which involved trading in shares, securities, and mutual funds. The Court noted that such investments were part of the assessee's stock-in-trade, similar to raw materials for a manufacturing concern.

3. Consistency in Accounting:
The CIT(A) and ITAT had favored the assessee based on the principle of consistency, noting that similar investments were treated as capital investments in previous years. However, the High Court observed that the assessee had a pattern of treating such investments as capital assets to manipulate tax liability. The Court emphasized that the principle of consistency should not be used to justify such manipulative practices.

4. Intention and Conduct:
The intention of the assessee at the time of making the investment and its subsequent conduct were crucial factors. The High Court found that the assessee's intention was to earn profits through trading in shares, securities, and mutual funds, rather than making long-term capital investments. The Court noted that the assessee had a history of redeeming investments prematurely to maximize profits, indicating a business motive rather than an investment motive.

Conclusion:
The High Court concluded that the income from the sale of Tata Mutual Funds (Dividend Plan) should be classified as business income, not short-term capital gains. The investment was part of the assessee's regular business activity and should be treated as stock-in-trade. The principle of consistency in accounting did not favor the assessee, as it had a history of manipulating investment classifications to reduce tax liability. The Court emphasized the importance of the assessee's intention and conduct, finding that the investment was made with a profit motive in the usual course of business. Consequently, the appeals filed by the revenue were allowed.

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