2015 (5) TMI 616 - HC - Income Tax

Sale of shares - capital gains or business income - Held that - Investment through Portfolio Management Service, which may deal with the shares of the assessee so as to derive maximum profits cannot be termed as business of the assessee but would only be a case of a more careful and prudent mode of investment, which has been done by the assessee. Funds which lie with the assessee can always be invested (for earning higher returns) in the shares either directly or through professionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment, which is in shares, and the law permits it to be taxed as capital gains and not as business income. - Decided in favour of assesse. Generation of profits by purchase and sale of shares after availing loan - Held that - The assessee having taken loan and having invested borrowed funds in purchase of shares, we are of the view that the Income Tax Act does not prohibit the assessee from making investments in capital assets after using borrowed funds. The Tribunal has also considered this aspect of the matter and decided in favour of the assesssee and we see no reason to differ with such opinion of the Tribunal. We have also gone through the Circular of the CBDT dated 15.06.2007 and are of the opinion that the findings arrived at by the Tribunal are in conformity with the guidelines issued by the said Circular - Decided against revenue.

Summary

Issues:
Challenging Tribunal's order treating income from sale of shares as capital gains instead of business income for assessment years 2006-2007 and 2008-2009.

Analysis:
1. Facts of the Case:
The respondent-assessee, engaged in finance and films, invested in shares through a Portfolio Management Scheme of M/s.Kotak Securities Limited. The Assessing Officer considered the transactions as 'business income' due to regular sale and purchase of shares. Appeals by the assessee were allowed by the Commissioner of Income Tax (Appeals), leading to challenges by the Revenue before the Income Tax Appellate Tribunal.

2. Contentions Raised:
The Revenue argued that employing a Portfolio Management Scheme implied a business activity, not capital gains. They highlighted the use of a loan for transactions as evidence of a business operation. Conversely, the respondent argued that using a Portfolio Management Service did not convert investments into business income, citing a lack of direct involvement in managing investments.

3. Judicial Analysis - First Issue:
The Court referenced a Delhi High Court case where a similar scenario favored the assessee, emphasizing that using a Portfolio Management Service for investments did not constitute a business activity. They noted the absence of a dedicated business structure for share transactions, indicating a prudent investment approach rather than a business operation.

4. Judicial Analysis - Second Issue:
Regarding the use of borrowed funds for share purchases, the Court found no legal prohibition against such actions under the Income Tax Act. They upheld the Tribunal's decision in favor of the assessee, aligning with the guidelines set by the CBDT Circular of 2007.

5. Conclusion:
The Court dismissed the Revenue's appeals, concluding that no substantial question of law arose. They affirmed that investments through Portfolio Management Services and using borrowed funds for share transactions did not alter the nature of income, which should be taxed as capital gains, not business income.

By analyzing the facts, contentions, and legal precedents, the Court upheld the Tribunal's decision, emphasizing the distinction between investment activities and business operations in determining the tax treatment of income from share transactions.