2017 (12) TMI 1116 - AT - Income Tax

Profit from investment through portfolio management service - capital gain or business income - nature of income - Held that - In the case of CIT vs. Kapur Investment P. Ltd (2015 (5) TMI 616 - KARNATAKA HIGH COURT) held that profit from investment through portfolio management service either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as same will not change nature of investment that is in shares, and law permits it to be taxed as capital gain and not as business income. We have also observed that the assessee has right from the beginning treated the amount held in shares as part of investment in the preceding assessment year. It was also brought to our notice that in the preceding assessment years 2005-06 to assessment year 2007-08 in the assessment made u/s. 143(3) the amount of gain arose from sale and purchase of shares was assessed under the head capital gain by the assessing officer. Similarly, it was also contended that in the subsequent years i.e. assessment year 2012- 13 to 2014-15 gain arising on sale and purchase of shares was shown under the head income from capital gain and were accepted by the assessing officer in the assessment made u/s. 143(3) of the act. After considering the above facts and legal findings, we are of the view that the ld. CIT(A) was not justified in upholding the addition made by the assessing officer as business income - Decided in favour of assessee.

Summary

Issues:
Classification of gain from share transactions as business income instead of capital gain; Treatment of Portfolio Management Service transactions as business transactions.

Analysis:
1. The primary issue in this case revolved around the classification of the gain earned by the assessee on share transactions. The assessing officer considered the income from share transactions as business income instead of capital gain. The assessing officer based this decision on the high number of transactions undertaken by the assessee during the financial year, the substantial amount involved, and the fact that the assessee did not file a tax audit report despite the turnover exceeding one crore. The assessing officer also noted that the assessee had obtained a significant loan used for investments in shares and mutual funds. Consequently, the assessing officer assessed the short term capital gain as income from business out of share trading activity.

2. The assessee appealed the decision before the CIT(A), who upheld the assessing officer's addition by citing various judicial precedents. The CIT(A) referred to decisions by different Tribunals and concluded that transactions under the Portfolio Management Service (PMS) scheme should be treated as business transactions. The CIT(A) emphasized that the income from PMS transactions cannot be considered as income from capital gains based on the decisions of the Tribunals. Therefore, the CIT(A) confirmed the addition made by the assessing officer, leading to the assessee's further appeal.

3. During the appellate proceedings, the assessee argued that the purchase and sale of shares should not be considered a business activity, and the gain earned should be treated as capital gain. The assessee presented judicial pronouncements supporting their stance. The Tribunal noted that the assessee consistently treated shares as investments in the balance sheets of previous years. Additionally, the Tribunal considered CBDT circulars allowing the assessee to have separate portfolios for investment and business purposes. The Tribunal also highlighted the decision of the Karnataka High Court, which held that profits from investments through PMS should be taxed as capital gains, not as business income.

4. After carefully examining the facts and legal findings presented, the Tribunal concluded that the CIT(A) erred in upholding the assessing officer's addition of business income. The Tribunal allowed the appeal of the assessee, emphasizing the consistent treatment of shares as investments, legal provisions permitting taxation as capital gains, and the past assessment history where gains from share transactions were accepted as capital gains. Consequently, the Tribunal ruled in favor of the assessee, overturning the previous decisions and allowing the appeal.

In conclusion, the Tribunal's judgment clarified the classification of income from share transactions and Portfolio Management Service transactions, emphasizing the importance of consistent treatment, legal provisions, and past assessment practices in determining the appropriate tax treatment.