2016 (11) TMI 385 - AT - Income Tax

Tax on amount of interest income earned upon Non Resident External Rupee Accounts ( NRE Accounts ) - denial of exemption claimed by the assessee u/s 10(4)(ii) - Held that - Assessee was on deputation to India with a subsidiary of M/s Sunlife Assurance Co of Canada. It has been further held that assessee was a person not resident in India as per provisions of FEMA. It has been further held by Ld. CIT(A) that the assessee satisfied both the conditions of section 10(4)(ii) of the Act. It is further noted by us that in the year before us the assessment was done ex-parte and addition was made by the Ld. CIT(A) by way of enhancement. It is further noted that facts have not been properly analysed by Ld. CIT(A) in the impugned year. On the other hand, in the assessment year 2009-10 proper factual analysis were made by Ld.CIT(A) and his order has been accepted by the revenue as per the facts narrated before us by the ld. Counsel. Under these circumstances, we find that the interest income of the assessee is exempt u/s 10(4)(ii) of the Act and, therefore, addition made by the Ld.CIT(A) with regard to interest earned in NRE account is directed to be deleted. Sale of shares in mutual fund under Portfolio Management Scheme (PMS) - capital gain or busniss income - Held that - Hon ble Karnataka High Court in the case of CIT vs Kapur Investments (P) Ltd (2015 (5) TMI 616 - KARNATAKA HIGH COURT ) has decided this issue in favour of the assessee by holding that the profits earned from investment through PMS whether directly or indirectly or though PMS, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment i.e. in shares, and law permits it to be taxed as capital gains and not as business income. Taking into account the facts of this case and legal position as is brought before us and also the fact that the claim of the assessee has been accepted by the AO as well as the Ld. CIT(A) consistently in all subsequent years, we hold that the action of Ld.CIT(A) in treating the income from PMS as business income is contrary to law and facts. The AO is directed to treat the said income as income assessable under the head Income from capital gains . The addition proposed by the Ld. CIT(A) in this regard is directed to be deleted.

Summary

Issues Involved:
1. Determination of total income and tax liability.
2. Taxability of interest earned on Non-Resident External Rupee Accounts (NRE Accounts).
3. Treatment of capital gains on sale of shares and mutual funds under Portfolio Management Scheme (PMS).
4. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Determination of Total Income and Tax Liability:
The general ground regarding the determination of total income at ?3,92,13,559 and tax liability at ?1,32,36,916 was dismissed as it was considered too general and not specific enough to warrant separate consideration.

2. Taxability of Interest Earned on NRE Accounts:
The appellant contended that the interest income earned on NRE accounts should be exempt under section 10(4)(ii) of the Income-tax Act, 1961. The CIT(A) had raised a new issue during the appellate proceedings, bringing the interest income of ?28,828 earned on NRE accounts to tax. The appellant argued that they were a resident outside India as per section 2(q) of the Foreign Exchange Management Act, 1999 (FEMA) and thus qualified for the exemption. The Tribunal noted that the AO had not made any addition regarding this income, implying satisfaction with the conditions of section 10(4)(ii). Additionally, for the subsequent assessment year 2009-10, the CIT(A) had accepted the appellant's status as a resident outside India, and no appeal was filed against this decision by the revenue. Therefore, the Tribunal directed the deletion of the addition made by the CIT(A) regarding the interest earned on NRE accounts, allowing the grounds related to this issue.

3. Treatment of Capital Gains on Sale of Shares and Mutual Funds under PMS:
The appellant argued that the capital gains from investments in shares and mutual funds through PMS should be treated as capital gains and not as business income. The CIT(A) had treated these transactions as an "adventure in the nature of trade" based on the number and volume of transactions, thereby classifying the income as business income. The Tribunal examined the facts and noted that the appellant was a salaried employee with no experience in the share market, and the investments were made through PMS for wealth maximization. The Tribunal referred to several judgments, including CIT vs Kapoor Investments Pvt Ltd and Radials International vs ACIT, which supported the appellant's position that investments through PMS should be treated as capital gains. The Tribunal highlighted that the AO had accepted the appellant's claim in subsequent years, assessing the income from PMS under the head "Income from capital gains." Therefore, the Tribunal directed the AO to treat the income from PMS as capital gains and delete the addition proposed by the CIT(A), allowing the related grounds.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The ground regarding the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature, as it was not yet ripe for adjudication.

Separate Judgment for A.Y. 2010-11:
For the assessment year 2010-11, the sole ground raised was the taxability of interest income earned on NRE accounts, identical to the grounds for A.Y. 2008-09. Following the decision for A.Y. 2008-09, the Tribunal allowed this ground and directed the deletion of the addition made by the AO.

Conclusion:
The appeals filed by the assessee were allowed, with the Tribunal directing the deletion of additions related to interest earned on NRE accounts and the treatment of income from PMS as capital gains. The initiation of penalty proceedings was dismissed as premature.