2016 (7) TMI 384 - AT - Income Tax

Profit on sale of shares - business income OR capital gains - Held that - It is an undisputed fact that the assessee earned profit on sale of shares and it is also a fact that assessee has availed the services of Portfolio Managers for purchase and sales of shares and the act of the assessee of engaging the PMS and the profits earned therefrom has been considered to be a part of business of the assessee by the ld.CIT(A). We find that Hon ble Karnataka High Court in the case of CIT-Bangalore vs. Kapur Investments (P) Ltd.(2015 (5) TMI 616 - KARNATAKA HIGH COURT) after relying on the decision of Hon ble Delhi High Court in the case of Radials International vs. ACIT 2014 (5) TMI 18 - DELHI HIGH COURT has held that the Portfolio Management Services (PMS) cannot be termed as business of the assessee. Thus we are of the view that the profit earned by the assessee on sale of shares is to be treated as capital gains and not as business income of the assessee.

Issues Involved:
1. Treatment of profits earned on the sale of shares.
2. Observations made by the CIT(A) regarding the facts and the use of borrowed funds.
3. Consideration of Portfolio Management Scheme (PMS) transactions as business transactions.
4. The magnitude and frequency of share transactions.
5. Consistency in the treatment of similar transactions in previous and subsequent years.

Detailed Analysis:

1. Treatment of Profits Earned on Sale of Shares:
The primary issue in this appeal is the treatment of profits earned on the sale of shares. The assessee reported Short Term Capital Gain (STCG) of ?11,45,160 and Long Term Capital Gain (LTCG) of ?3,37,983. The Assessing Officer (AO) reclassified the STCG as business income, citing frequent transactions and the use of Portfolio Management Scheme (PMS) for trading. The CIT(A) upheld this reclassification, noting the high volume and frequency of transactions, and the engagement of portfolio managers.

2. Observations Made by CIT(A) Regarding Facts and Use of Borrowed Funds:
The CIT(A) observed that the assessee did not show any business income in the return and noted that the AO's observation about the use of borrowed funds for buying shares was not disproved. The CIT(A) relied on the ITAT decision in the case of Purnima K. Shah, which supported the AO's view that borrowed funds were used for share trading, thus treating the income as business income.

3. Consideration of PMS Transactions as Business Transactions:
The AO and CIT(A) considered transactions through PMS as business transactions, arguing that the funds were placed at the disposal of PMS managers for the purpose of earning quick profits. However, the assessee contended that investments through PMS should not be considered as business activities. The assessee relied on the judgments of the Karnataka High Court in CIT-Bangalore vs. Kapur Investments (P) Ltd. and the Delhi High Court in Radials International vs. ACIT, which held that PMS transactions do not constitute business activities.

4. Magnitude and Frequency of Share Transactions:
The CIT(A) noted that the assessee engaged in 372 transactions involving more than 300 companies, with some shares held for only a few days. This high volume and frequency indicated an intention to trade rather than invest. The CIT(A) cited the Gujarat High Court's criteria in CIT vs. Rewashanker A Kothari, which include the number, frequency, quantity, and value of transactions to determine whether income from shares should be classified as capital gains or business income.

5. Consistency in Treatment of Similar Transactions in Previous and Subsequent Years:
The assessee argued that profits from share sales in previous and subsequent years were treated as capital gains and accepted by the Revenue. This consistency was not disputed by the Revenue. The assessee further supported this argument with the judgment of the Karnataka High Court in CIT-Bangalore vs. Kapur Investments (P) Ltd., which emphasized that investments through PMS should be treated as capital gains, not business income.

Conclusion:
The Tribunal, after considering the rival submissions and relevant judgments, concluded that the profits earned by the assessee on the sale of shares should be treated as capital gains and not as business income. The Tribunal found that the Revenue did not provide any contrary binding decision or distinguish the facts of the present case from the cited judgments. Therefore, the Tribunal allowed the appeal, setting aside the order of the CIT(A) and directing that the profits from the sale of shares be treated as capital gains.

Order:
The appeal of the assessee is allowed, and the order of the CIT(A) is set aside. The profits earned on the sale of shares are to be treated as capital gains. The judgment was pronounced on June 6, 2016, at Ahmedabad.

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