2016 (7) TMI 451 - AT - Income Tax

Share transaction - Capital gain v/s business income - assessee had availed the services of a PMS provider - Held that - ind the AO had reopened the scrutiny assessment and had held that the income of the assessee arising out of sale of shares had to be taxed under the head business income and not under the heads STCG or LTCG, that the FAA reversed the decision of the AO considering the fact that the assessee had availed the services of a PMS provider. In our opinion, once an assessee approaches a PMS provider, he loses control over the decision-making process for making investment in the shares. It is the PMS provider who decides as to how much money is to be invested and in which scripts- all the decisions related with sale and purchase of shares are taken by the PMS provider. Thus treating the income from sale of shares is income from Short-Term Capital Gains (STCG) of ₹ 2. 99 Crores and Long-Term Capital Gains (LTCG) of ₹ 87, 471/- as against the business income assessed by the AO confirmed - Decided in favour of assessee

Summary

Issues involved:
1. Treatment of income from sale of shares as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) versus business income.
2. Validity of reassessment proceedings and treatment of income from investment held under Portfolio Management Scheme (PMS).

Issue 1: Treatment of income from sale of shares
The Assessing Officer (AO) challenged the order of the CIT (A) regarding the treatment of income from the sale of shares. The AO contended that the assessee, an individual deriving income from various sources, engaged in large-scale share transactions with the intention of making a profit, thus treating the gains as business income instead of capital gains. The AO observed that the assessee had conveniently categorized transactions to save taxes, distinguishing between Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the duration of holding shares. Consequently, the AO assessed all share transaction profits as business income. The First Appellate Authority (FAA) upheld the AO's decision, stating that the reassessment proceedings were valid and not a case of change of opinion. The FAA concluded that the AO had appropriately recorded reasons for reopening and rejected the assessee's objections.

Issue 2: Validity of reassessment proceedings and treatment of PMS income
The assessee argued before the FAA that income from investment held under the Portfolio Management Scheme (PMS) should be taxed as capital gains, emphasizing that the PMS provider had discretionary control over investments. The FAA referenced relevant case laws and highlighted that the PMS provider's decisions were independent of the assessee's influence, focusing on growth prospects rather than immediate profits. The FAA concluded that the AO's decision to tax gains from share sales as business income was unjustified. During the appeal hearing, the Departmental Representative supported the AO's stance, emphasizing the assessee's extensive share transactions and profit motive. However, the tribunal noted that once an assessee engages a PMS provider, they relinquish control over investment decisions, which are solely made by the PMS provider. Citing a previous tribunal decision, the tribunal emphasized that PMS investments aimed at wealth maximization do not constitute trading in shares. The tribunal rejected the AO's contentions and dismissed the appeal, affirming that the income from share sales should be treated as capital gains, not business income.

In conclusion, the tribunal's judgment dismissed the appeal filed by the AO, upholding that the income from the sale of shares, managed under a Portfolio Management Scheme, should be taxed as capital gains rather than business income. The decision emphasized the control exercised by the PMS provider over investment decisions and the objective of wealth maximization, ultimately determining the treatment of income in favor of the assessee.