2019 (3) TMI 809 - AT - Income Tax

Gains earned from share transactions engaging PMS Portfolio Management Service - characterization of income - correct head of income - capital gain or busniss income - HELD THAT - As decided in own case in A.Y. 2010-11 we confirm the order of CIT(A) holding the activity of purchase and sale of shares by engaging PMS constitutes an investment activity and the resultant gain/loss is assessable under the head capital gains - Decided against revenue

Summary

Issues Involved:
1. Treatment of income from share transactions through Portfolio Management Services (PMS) as capital gains or business income.
2. Assessment of the activity of transaction in shares/mutual funds by engaging PMS as an investment activity.

Detailed Analysis:

1. Treatment of Income from Share Transactions through PMS as Capital Gains or Business Income:
The primary issue in this case is whether the income earned by the assessee from share transactions through PMS should be treated as capital gains or as income from business and profession. The Assessing Officer (AO) argued that the organized activity carried out by the assessee through PMS was a business activity, thus treating the profits earned as "income from business and profession." This decision was based on the fiduciary capacity of the Portfolio Manager acting as Trustee and Agent of the assessee.

However, the Commissioner of Income-Tax (Appeals) [CIT(A)] disagreed with the AO, following the precedent set in the assessee's own case for A.Y. 2010-11. The CIT(A) held that the activity of share transactions through PMS should be considered an investment activity, and the resultant gain should be assessable as "capital gains."

The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the issue was identical to the one in the assessee's own case for A.Y. 2010-11. The Tribunal referenced previous decisions, including those in the cases of Yugmarg Investment & Trading Pvt. Ltd. and KRA Holding & Trading Pvt. Ltd., which supported the treatment of profits from PMS as capital gains.

2. Assessment of the Activity of Transaction in Shares/Mutual Funds by Engaging PMS as an Investment Activity:
The Tribunal examined whether the activity of transacting in shares/mutual funds through PMS constitutes an investment activity. The Tribunal cited its previous rulings, which characterized the PMS as an activity of wealth maximization rather than profit maximization. It was emphasized that the nature of Discretionary PMS is to achieve growth prospects, and the decisions regarding transactions are made by the PMS provider, not the assessee.

The Tribunal also addressed the AO's objections regarding the volume and frequency of transactions, the intention behind holding shares, and the nature of the transactions. It was found that the volume and frequency of transactions were not significant enough to constitute a business activity. Moreover, the Tribunal noted that the assessee had earned substantial dividends, further supporting the investment nature of the transactions.

The Tribunal concluded that the objections raised by the AO had been adequately addressed by the CIT(A), affirming that the investments carried out through PMS do not result in gains assessable as business income. The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s order that the activity of purchase and sale of shares by engaging PMS constitutes an investment activity, and the resultant gain/loss is assessable under the head "capital gains."

Conclusion:
The appeal filed by the Revenue was dismissed, with the Tribunal confirming that the income from share transactions through PMS should be treated as capital gains, and the activity of engaging PMS for share/mutual fund transactions constitutes an investment activity. The Tribunal's decision was based on previous rulings and the consistent treatment of similar issues in the assessee's own case and other related cases.