2011 (5) TMI 498 - AT - Income Tax

Condonation of delay - Business income vs. Capital gain - the parties mentioned that it was the subject-matter of the appeal for adjudication before this Tribunal in the first round of the proceedings in the assessee s own case in connection with appeals ITA Nos. 499 & 500/PN/08 and the Tribunal held that the securities in question being the investments, the sale proceeds of the same are assessable under the head Capital gains and consequently, the Tribunal upheld the assessee s decision of taxing the same under the head Capital gains - Decided in favor of the assessee Regarding fee paid to Asset Management Company - assessee submitted before the first appellate authority that the fee paid was correctly claimed as deduction the commutation of capital gains - It is evident and binding that the expenditure if undisputedly, necessarily and genuinely spent for the asset s transfer within the scope of the provisions of section 48 of the Act, the claim cannot be disallowed for want of the express provisions in section 48 of the Act - it is the settled position at the level of the Tribunal that the Portfolio management activity is an investment activity and neither the business activity nor the activity amounting to an adventure in the nature of trade - The expenditure is undisputedly for the twin purposes of acquisition of the securities and the sales of the same. The expenditure is arrived at on profits sharing basis, which is now allowable basis by the SEBI - Decided in favor of the assessee

Issues Involved:
1. Whether the income earned on the sale of shares should be assessed under 'Profits and gains of business or profession' or 'Capital gains'.
2. Allowability of the fee paid to the Asset Management Company (ENAM).

Issue-Wise Detailed Analysis:

1. Whether the income earned on the sale of shares should be assessed under 'Profits and gains of business or profession' or 'Capital gains':

The Tribunal had previously adjudicated this issue in the first round of proceedings in the assessee's own case (ITA Nos. 499 & 500/PN/08). It was held that the securities in question were investments, and the sale proceeds should be assessed under 'Capital gains'. The Tribunal upheld the assessee's decision to tax the same under 'Capital gains'. The relevant paragraph from the Tribunal's order reads:

"27. To conclude, the circumstances and the plethora of precedents unmistakably points out that the assessee was not directly involved in the trading activity. Therefore its holding was nothing but an investment. What is decisive is the conduct and the intention of an investor which has been established in the present appeal that the appellant had simply acted in the fashion to maximize the value of its wealth holding, in the shape of shares. Such an activity cannot be held a profit making activity of a business concern but safely it can be held as a profit seeking activity of an investor. Resultantly our view goes in favour of the assessee, thus the grounds are allowed."

This decision was not reversed or interfered with by higher judicial authorities. Consequently, the Tribunal found that the grounds relating to the head of income in the present appeals are covered in favor of the assessee.

2. Allowability of the fee paid to the Asset Management Company (ENAM):

The Tribunal examined the allowability of the fee paid to ENAM under section 48 of the Income Tax Act. The Assessing Officer (AO) had disallowed the termination fee (TF) paid to ENAM, arguing that it constituted 'profit sharing fee' and was not authorized by any agreement or SEBI regulations. The AO relied on clause 14(3) of the SEBI (Portfolio Managers) Rules & Regulations, 1993, which prohibits fees on a return-sharing basis.

The assessee argued that the fee was incurred in connection with the acquisition and sale of shares, and thus should be capitalized as part of the cost of acquisition. The assessee also contended that the fee was within the limits provided under the agreement and was consistently followed. The CIT(A) dismissed the assessee's grounds, upholding the AO's decision.

Before the Tribunal, the assessee relied on various judicial precedents, including the Gujarat High Court's decision in Rajkot District Gopalak Co-op. Milk Producers' Union Ltd. v. CIT and the Bombay High Court's decision in CIT v Smt. Shakuntala Kantilal, which supported the deduction of genuine expenditure incurred in connection with the transfer of capital assets.

The Tribunal found that the fee paid to ENAM was genuine and necessary for the acquisition and sale of securities. The Tribunal also noted that SEBI regulations had been amended to allow return-based fees. Consequently, the Tribunal held that the fee paid to ENAM should be allowed as a deduction under section 48 of the Act.

Findings of the Tribunal:

The Tribunal concluded that the fee paid to ENAM was directly connected to the acquisition and sale of securities, was genuinely incurred, and was necessary for the transfer of the assets. The Tribunal also held that the expenditure should be allowed under section 48 of the Act, following the principles laid down by the jurisdictional High Court in Smt. Shakuntala Kantilal's case.

Conclusion:

The appeals by M/s. KRA Holding & Trading (P.) Ltd. and M/s. ARA Trading & Investments (P.) Ltd. were allowed. The Tribunal held that the income from the sale of shares should be assessed under 'Capital gains' and that the fee paid to ENAM should be allowed as a deduction under section 48 of the Act.

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