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2014 (9) TMI 355 - AT - Income TaxProfits and gains from portfolio management scheme - Dividend income taxed as business income - Whether profit earned on sale of equity share under portfolio management scheme was assessable as capital gains Held that - Funds were given by assessee to investment managers, who are managing the investments in shares and mutual funds - The stand of the assessee that shares are held as investments and profit earned thereon is liable to tax under capital gain tax and was not as business profit was accepted by the department in scrutiny assessment for the AY 2006-07 - the assessee sold share after being entered in the demat account of PMS, the profit of which was treated by the AO as business income - assessee is investing in shares in mutual funds through PMS only after selling the shares assessee has withdrawn all the money in the PMS and invested in the bank FD Following the decision in Radials International Versus Asstt. Commissioner of Income Tax 2014 (5) TMI 18 - DELHI HIGH COURT - Intention of investors was not to make profit - The terms of the agreement entered into with the portfolio manager indicate that regardless of the level of discretion handed over to the portfolio manager, there is neither any guarantee that the securities invested in will appreciate nor is the portfolio manager responsible to the client for nay loss from the deficiency of value of the securities. The PMS agreement at best, embodies the intention to appoint an agent with limited liability, who will invest on behalf of the investor and nothing more - it would not be possible to evaluate as to whether the transaction was actually in the nature of trade, until the securities are actually resold - in a discretionary PMS, it becomes all the more relevant and necessary to evaluate the intention of the assessee in conjunction with his conduct and other circumstances, since the intention of the assessee cannot be ascertained at the time of depositing the money in the investment, because the actual sale and purchase of securities happens at the hands of the portfolio manager, a mere agent - since the intention of the assessee cannot be ascertained, and the investments are made by the portfolio manager without the knowledge of the assessee/investor in a discretionary PMS, the manner in which the securities have been treated by the assessee can and ought to be evaluated only post the fact of investment, and not at the time of depositing the money relying upon Commissioner of Income-Tax (Central), Calcutta Versus Associated Industrial Development Co. Pvt. Limited 1971 (9) TMI 3 - SUPREME Court - whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. As per the terms of agreement, the assessee has no control over the investment being made by the portfolio investor - The assessee puts his money with the portfolio manager, who makes investment as per the market study of their team of experts - as per the terms, the portfolio manager does not give any guarantee of profit or loss - the percentage to total quantity works out to be 29.55 for less than 90 days, 19.09 for 90-180 days, 16.36 for 181-365 days and 35.00 for more than 365 days - the shares of assessee held under portfolio management scheme was sold after holding for reasonable period the order of the AO cannot be upheld for treating the profit on sale of portfolio shares under portfolio investment scheme as business income also , the dividend income so earned is exempt u/s.10(34) of the I.T. Act - Decided in favour of assessee.
Issues Involved:
1. Taxability of profit and gain earned from Portfolio Management Services (PMS) under "Profit and gains of business or profession". 2. Classification of income from share trading as business income versus capital gains. 3. Tax treatment of dividend income received from PMS. Detailed Analysis: 1. Taxability of Profit and Gain from PMS: The primary issue was whether the profit and gain earned by the assessee from activities carried out by PMS Managers should be taxed under "Profit and gains of business or profession". The assessee argued that they were investors in equity shares and mutual funds, and the profits should be treated as capital gains. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) treated these as business income, citing the partnership firm's intention to make profits through share trading. The Tribunal, however, referenced the Delhi High Court's decision in Radials International Vs. ACIT, which held that profits from PMS should be assessed as capital gains, given the discretionary nature of the PMS agreement and the lack of control by the investor over specific transactions. 2. Classification of Income from Share Trading: The AO concluded that the assessee was a dealer in shares and thus the income from this activity should be assessed under "profits and gains from business". The assessee contended that the shares were held as investments, evidenced by their treatment in the books of accounts and the holding period of the shares. The Tribunal noted that a substantial portion of the shares were held for more than six months, indicating an investment motive rather than trading. They also emphasized that the assessee had consistently treated the shares as investments in previous years, which was accepted by the department. 3. Tax Treatment of Dividend Income: The AO taxed the dividend income received by the assessee from PMS as business income. The assessee argued that dividend income is specifically exempt under Section 10(34) of the Income Tax Act, irrespective of whether it is received as an investor or a dealer in shares. The Tribunal agreed with the assessee, stating that the dividend income should be exempt from tax as per the provisions of Section 10(34). Conclusion: The Tribunal allowed the appeal of the assessee, concluding that: - The profits from PMS should be treated as capital gains and not as business income, following the principles laid down by the Delhi High Court in Radials International Vs. ACIT. - The dividend income received from PMS is exempt under Section 10(34) of the Income Tax Act and should not be taxed as business income. Order Pronounced: The appeal of the assessee was allowed, and the order was pronounced in the open court on 28/08/2014.
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