2016 (5) TMI 200 - AT - Income Tax

Transaction in shares - income under the head business or income from capital gains - Held that - Investment through Portfolio Management Service, which may deal with the shares of the assessee so as to derive maximum profits cannot be termed as business of the assessee but would only be a case of a more careful and prudent mode of investment, which has been done by the assessee. Funds which lie with the assessee can always be invested (for earning higher returns) in the shares either directly or through professionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment, which is in shares, and the law permits it to be taxed as capital gains and not as business income. See Commissioner of Income Tax, Deputy Commissioner of Income Tax Versus M/s Kapur Investments (P) Ltd. 2015 (5) TMI 616 - KARNATAKA HIGH COURT - Decided against revenue

Summary

Issues:
1. Treatment of income from transactions in dealing in shares as income from capital gains or business income.
2. Application of the principle of res judicata in income tax proceedings.

Analysis:

Issue 1: Treatment of income from transactions in dealing in shares
The Revenue challenged the order of the CIT(A) directing the computation of income from transactions in shares as income from capital gains. The Assessing Officer proposed treating the income as business income due to the substantial volume of share transactions. The assessee argued that the transactions were investments through portfolio management services, emphasizing periodic portfolio reviews. The AO contended that the categorization of investments was irrelevant and that borrowed funds were used for share investments. The CIT(A) relied on the assessee's case for previous years, holding that the income should be treated as long-term capital gains, not business income. The Tribunal affirmed this decision, citing the intention of holding shares for investment and the absence of evidence contradicting the CIT(A)'s conclusion. Judicial views were also considered, supporting the treatment of surplus from share sales as capital gains. The jurisdictional High Court concurred, emphasizing that investment through portfolio management services does not constitute a business activity, and using borrowed funds for investments is permissible under the Income Tax Act. The Tribunal decision was found to align with CBDT guidelines, leading to the dismissal of the Revenue's appeal.

Issue 2: Application of res judicata
The Revenue argued against the application of res judicata, contending that the CIT(A) should not rely on previous orders for different assessment years. However, the Tribunal and the jurisdictional High Court found that the issue had been extensively deliberated in prior cases, and the CIT(A) was justified in applying consistent reasoning across assessment years. The High Court concluded that no substantial question of law arose, affirming the Tribunal's decision in favor of the assessee.

In conclusion, the judgment upheld the treatment of income from share transactions as capital gains, rejected the Revenue's appeal based on established legal principles and judicial precedents, and dismissed the application of res judicata in this context.