2014 (1) TMI 708 - AT - Income Tax

Purchase and sale of shares through PMS - Nature of income - Held that - Following assessee s own case for A.Y. 2003-04 - PMS Manager was authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made on behalf of the assessee - PMS Manager was also authorized to hold all or any of such investment in his name or at his discretion on behalf of the assessee and make every effort to maximize the value of investment - The PMS Manager was required to provide the assessee with quarterly statement of investment - The Tribunal noted that the PMS Manager had sole and absolute discretion to make investment for and on behalf of the assessee and the assessee had no role to play - The assessee had not taken any borrowed funds for placing money with the PMS Manager - The average holding period of the shares was more than two months - The Tribunal accordingly concluded that the income earned from PMS has to be assessed as capital gain - STCG Rs.83,14,515/- earned by assessee and LTCG of Rs.70,39,652/- earned by assessee on sale/purchase of shares and securities through PMS is to be assessed under the head capital gains and not as business income of the assessee Decided in favour of assessee. Sale of shares - Income from business or income from capital gains - Held that - Each case depends on its own facts and circumstances - There are various factors such frequency, volume, and entries in the books of account, nature of fund used, holding period etc which are relevant in deciding true nature of transaction and no single factor is conclusive Following Raja Bahadur Visheshwara Singh. V/s CIT 1960 (12) TMI 12 - SUPREME Court - The treatment in the books of an assessee will not be conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it becomes business profit and not capital gains Whether a particular holding is by way of investment or form part of stock-in- trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares which are held as investment and those held as stock-in-trade - The important factor is the intention of the assessee at the time of purchase, which has to be gathered from the actual conduct of the assessee while dealing with the shares subsequently and not only on the basis of entry in the books of account. The department accepted the transactions made by assessee of his own for purchase and sale of shares as investment i.e. for assessment years 2003-04, 2004-05, 2005-06 and 2006-07 in the assessment made under section 143(3) of the Act - In the assessment year under consideration the AO has taken a contrary view to the earlier assessment years stating that the assessee is carrying on of his own purchase and sale of shares activities in a systematic and organized way which partake the character of business The finding of the ld. CIT(A) has no merits and particularly when we observe from the period of holding of shares - The LTCG had accrued to the assessee, where the period of holding is more than 24 months and therefore, the order of ld. CIT(A) to treat the said LTCG accrued to the assessee as business income is not supported by facts particularly when there is no purchase of shares by assessee in the assessment year under consideration and said shares were held by assessee for a period of more than 24 months Decided in favour of assessee.

Summary

Issues Involved:

1. Assessment of income from sale of shares and securities through Portfolio Management Services (PMS) as "Income from Business or Profession" versus "Capital Gains".
2. Assessment of income from sale of shares and securities carried out independently as "Income from Business or Profession" versus "Capital Gains".

Detailed Analysis:

Issue 1: Assessment of Income from Sale of Shares through PMS

The primary issue is whether the income earned by the assessee from the purchase and sale of shares through PMS should be assessed as business income or as capital gains. The Tribunal previously addressed this issue in the assessee's case for assessment years 2005-06 and 2006-07, ruling that investments made through PMS are not a scheme of trading in shares and should be assessed under the head "capital gains". The Tribunal noted that the nature of PMS allows the portfolio manager to make investment decisions on behalf of the assessee, and the assessee does not play an active role in these transactions. The Tribunal's decision was based on the fact that the assessee did not use borrowed funds and the average holding period of shares was more than two months.

In the current assessment year, the Tribunal followed its earlier decisions and held that the short-term capital gains (STCG) of Rs. 83,14,515 and long-term capital gains (LTCG) of Rs. 70,39,652 from PMS should be assessed as capital gains, not as business income. The Tribunal reversed the orders of the lower authorities, which had treated these gains as business income.

Issue 2: Assessment of Income from Sale of Shares Carried Out Independently

The second issue is whether the STCG of Rs. 36,08,276 and LTCG of Rs. 2,98,36,506 from the sale of shares carried out independently by the assessee should be assessed as capital gains or as income from business or profession. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] had treated these gains as business income, citing factors such as the frequency of transactions, the short holding period, and the systematic nature of the activity.

The Tribunal, however, noted that the assessee had been carrying out similar transactions in previous years, which were accepted as capital gains by the department. The Tribunal emphasized that the assessee used his own funds for these transactions and did not borrow money. It also pointed out that the maximum LTCG was from shares held for more than 24 months, which were previously considered investments in earlier assessments under section 143(3) of the Income Tax Act.

The Tribunal concluded that the gains from these transactions should be assessed as capital gains, not business income. It reversed the orders of the lower authorities and directed that the LTCG of Rs. 2,98,36,506 and STCG of Rs. 36,08,276 be treated as capital gains.

Conclusion:

The Tribunal allowed the appeals of both assessees, holding that the income from the sale of shares and securities through PMS and carried out independently should be assessed as capital gains. The Tribunal reversed the orders of the lower authorities, which had treated these gains as business income. The decision was based on the consistent treatment of similar transactions in previous years, the use of own funds, and the nature of the transactions.