2016 (4) TMI 737 - AT - Income Tax

Share transaction - Short term capital gains or business income - nature of transaction - Held that - The principles of consistency has to be followed in the tax matters unless Revenue is able to demonstrate that there is a marked deviation in facts situation as existing in the relevant assessment year vis- -vis earlier years which the revenue in the instant case is not able to demonstrate. The assessee has engaged the services of portfolio manager-Enam(copy of the agreement is also placed on record in paper book filed with the tribunal) only at the fag-end of the previous year relevant to the impugned assessment year and no shares have been sold through the portfolio managers during the previous year relevant to impugned assessment year and only purchases of shares were made by the said portfolio manager on behalf of the assessee during the impugned assessment year, thus no gains whatsoever has arisen to the assessee though the dealings with Enam during the impugned assessment year, thus the finding of CIT(A) with respect there-to by holding that the assessee has made gains while buying and selling of shares by engaging services of portfolio manager s is to that extent erroneous vis- -vis the facts as emerging from the records. Under these circumstances , we have no hesitation in holding that the assessee is not a trader in shares and the assessee is an investor in shares and the gain arising there-from shall be charged to tax as capital gains and not as business income as held by the AO and confirmed by the CIT(A) in their respective orders and we set aside the orders of the authorities below and holds that short term capital gain earned by the assessee shall be charged to tax as short term capital gains in the hands of the assessee as offered to tax by the assessee in the return of income filed with the Revenue. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of Short Term Capital Gains (STCG) as Business Income.
2. Treatment of gains from Portfolio Management Schemes (PMS) as Business Income.

Issue 1: Classification of Short Term Capital Gains (STCG) as Business Income

The primary issue revolves around whether the Short Term Capital Gains (STCG) of ?23,64,191/- earned by the assessee on the sale of shares should be treated as "Income from business" or "Short Term Capital Gains." The assessee argued that the intention was to hold shares as an investment and earn dividends, with all shares reflected in the demat account. The Assessing Officer (AO) observed that the magnitude and frequency of transactions indicated a trading intent, supported by minimal dividend income (?85,182/-) compared to the STCG. The AO relied on CBDT Circular No. 4/2007 and Supreme Court decisions, concluding that the transactions were business activities rather than investments. The CIT(A) upheld this view, noting the involvement of a Portfolio Manager and the nature of transactions as profit-maximizing rather than investment-oriented.

Issue 2: Treatment of Gains from Portfolio Management Schemes (PMS) as Business Income

The CIT(A) directed that all gains from PMS, whether declared as STCG or Long Term Capital Gains (LTCG), be treated as business income. The assessee contended that the PMS manager acted as an agent, and the intention was to hold shares as investments. The CIT(A) countered that the PMS manager's role as an agent trading on behalf of the assessee indicated a business activity, not an investment. The financial statements from the PMS were presented as profit and loss statements, further supporting the business income classification.

Detailed Analysis:

Classification of Short Term Capital Gains (STCG) as Business Income

The Tribunal noted that the assessee, a pensioner, had been dealing in shares for years, consistently showing them as investments in financial statements. The shares were held for periods ranging from 20 to 354 days, and the transactions were not repetitive. The assessee used own funds, not borrowed ones, for investments. The Tribunal emphasized the principle of consistency, noting that the Revenue had accepted the assessee's capital gains classification in previous years. The Tribunal found no marked deviation in facts for the assessment year in question. The Tribunal concluded that the assessee's activities were those of an investor, not a trader, and the STCG should be taxed as capital gains, not business income.

Treatment of Gains from Portfolio Management Schemes (PMS) as Business Income

The Tribunal observed that the assessee engaged a PMS manager, Enam, at the end of the assessment year, with no shares sold through the PMS during the year. Only purchases were made by the PMS manager. The Tribunal found the CIT(A)'s conclusion, that gains from PMS should be treated as business income, to be erroneous. The Tribunal ruled that the gains should be treated as capital gains, not business income, as the assessee's intent was investment, not trading.

Conclusion:

The Tribunal set aside the orders of the AO and CIT(A), holding that the STCG of ?23,64,191/- should be taxed as short term capital gains, not business income. The appeal filed by the assessee was allowed.