2015 (5) TMI 355 - AT - Income Tax

Treatment of income - transaction of shares - short term capital gains or business income - Held that - The mutual funds/shares have been shown as investment and not closing stock that the closing balance have been valued at cost and not at cost or market value whichever is lower , that no borrowed funds have been used etc. the income from investment may be treated as income from capital gains and not as income from business. Ld. CIT(A) has observed that the AO has wrongly stated that the assessee has traded in derivatives which cannot be treated as investment. On perusal of the records, it is noticed that the transactions in respect of derivatives are not part of the short term capital gain. These have been separately quantified as business transactions and on this aspect a letter dated 4th December, 2009, has also been filed with the assessing officer clarifying this position. The Assessing Officer has reasoned that the assessee firm has earned incentive income and this incentive income has to be assessed as business income and the other income shall also become business income. We concur with the ld CIT(A) that this interpretation of the assessing officer is incorrect. The assesse having made investments and consequent to such investments some incentive is received. Treatment of that incentive income will not change the nature of the investments. On the contrary, this receipt of incentive itself confirms the fact that this assessee has earned incentive consequent to investments being made, which is normally given to the investor. - Decided against revenue. Portfolio management - Held that - The assessee has made investments through portfolio management in five cases, and out of these five cases, the assessee has suffered losses in two cases to the extent of ₹ 21,65,551/- and has made gain in three cases of ₹ 36,04,177/- with the result that the net gain on account of portfolio management is only ₹ 14,38,626/- out of the total capital gain of Rs.l,76,03,580/-. The investment in portfolio management is a common feature and cannot be held to be a business. Another reason of the Assessing Officer is that assessee has prepared books of account, Profit and Loss Account and Balance Sheet and has got the same audited. There is nothing wrong in this. The assessee being a legal entity is required to maintain its books of account and get the same audited. This cannot be a ground for the assessing officer to hold that the assessee is carrying on business. The ld CIT(A) has rightly observed that if the contention of the assessing officer is accepted then probably in each and every case will be covered under the business income and there will be no case for investment. The assessing officer is wrong in assuming that for the purpose of investment, the books of account are not required to be maintained or are not required to be audited. CIT(A) has rightly held that held that the Assessing Officer was not justified in changing the treatment of income of appellant from Short term' capital gains to Income from business. The Assessing Officer was accordingly, directed to treat the income of ₹ 1,76,03,581/- declared by the assessee as Short term capital gains only and not as Business income. No infirmity in the order of the Ld. CIT(A)-Decided against revenue. Portfolio Management Fees surrendered and offered for taxation on account of being not allowable u/s 48 - Held that - the income in question has been held to be short term capital gains only and not as business income, the aforesaid amount of ₹ 41,88,451/- has to be added back on account of Portfolio Management Fees while calculating the income from short term capital gains. We find that the ld CIT(A) has rightly directed that ₹ 41,88,451/- need to be added back while computing the income of the assessee. We do not find any infirmity in the said decision of the ld CIT(A) on the facts and circumstances of the case - Decided against revenue. Loss on trading of derivatives - whether be considered as business loss only and allowed to be set off against other income - Held that - As per section 43(5)(d) of the Act, the profit/ loss on trading of derivatives will have to be considered as business income/ loss only. So in the instant case the loss is business income and the ld. CIT(A) has rightly held that the loss of ₹ 8,26,229/- on trading of derivatives is to be considered as business loss only and allowed to be set off against other income as per the provisions of the Act. In the background of the aforesaid discussions, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the same - Decided against revenue.

Summary

Issues Involved:
1. Classification of income as short-term capital gains or business income.
2. Allowability of Portfolio Management Fees (PMS) as business expenditure.
3. Treatment of loss on trading of derivatives as business loss or speculative loss.

Detailed Analysis:

1. Classification of Income as Short-Term Capital Gains or Business Income:
The primary issue was whether the income of Rs. 1,76,03,581/- declared by the assessee should be treated as short-term capital gains or business income. The Assessing Officer (AO) classified it as business income due to the high volume of transactions and the nature of the receipts, which were considered trading receipts rather than investment receipts. However, the CIT(A) and the Tribunal found that the assessee's intention was to invest, as evidenced by several factors:
- The assessee firm was constituted for the purpose of investment, as indicated by its name, "Ascot Investments."
- The firm invested its own funds, not borrowed funds, in various mutual funds, shares, and securities.
- A significant amount of dividend income was earned, indicating an investment motive.
- The assessee maintained investments in its books of account and balance sheet, valuing them at cost rather than "cost or market value whichever is lower," which is typical for stock-in-trade.

The Tribunal upheld the CIT(A)'s decision, noting that the AO's reliance on the definition of partnership from the Indian Partnership Act was misplaced. The Tribunal emphasized that the income should be assessed under the appropriate heads as per the Income Tax Act, and the AO's interpretation would lead to absurd results. The Tribunal also noted that the absence of long-term capital gains was due to this being the first year of the firm's operations.

2. Allowability of Portfolio Management Fees (PMS) as Business Expenditure:
The AO had treated the PMS fees of Rs. 41,88,451/- as allowable business expenditure, assuming the income from the sale of shares and mutual funds was business income. However, since the Tribunal upheld the classification of the income as short-term capital gains, the PMS fees were not allowable under Section 48 of the Income Tax Act for calculating capital gains. The Tribunal agreed with the CIT(A) that the PMS fees should be added back while computing the income from short-term capital gains.

3. Treatment of Loss on Trading of Derivatives as Business Loss or Speculative Loss:
The assessee had initially claimed the loss on trading of derivatives as speculative loss but later contended it should be treated as business loss under Section 43(5)(d) of the Income Tax Act. The CIT(A) accepted this contention, noting that the AO did not address this issue in the assessment order. The Tribunal upheld this decision, confirming that the loss on trading of derivatives should be considered as business loss and allowed to be set off against other income as per the provisions of the Act.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision on all issues. The income of Rs. 1,76,03,581/- was rightly treated as short-term capital gains, the PMS fees were correctly added back to the capital gains, and the loss on trading of derivatives was properly classified as business loss. The Tribunal's decision was pronounced in the open court on 27.04.2015.