2016 (2) TMI 344 - AT - Income Tax

Purchase and sale of shares - Capital Gains or Business Income - whether the assessee had purchased/sold the shares in question as an investor or as a share trader; whether any borrowed funds were utilized or the assessee has invested its own funds and whether the shares in question were purchased/sold under a Portfolio Management Scheme or the assessee has made the transaction as a share trader? - Held that - Admittedly, the objective of the appellant trust is to ensure effective succession planning mechanism and transfer of funds from generation to generation for the benefit of the family members of the settler and protecting the family wealth as the trust beneficiaries are only family members i.e., purely blood relatives including children and grand children. The shares in question were acquired and transferred through Portfolio Managers engaged by the assessee. The entire investments have come out of the Corpus Fund of the assessee and no borrowed funds were utilized for purchase of the shares in question. In view of the aforesaid facts the contention of the revenue that the assessee has indulged in business activities in the guise of share investment has no merit. It is quite clear that the over-riding intention of the assessee is not to trade in shares even when the purchase and sale of shares was made through various Portfolio Managers. Therefore the CIT(A) has rightly held the income in question as Capital Gains and not the Business Income . Thus it can be concluded that the assessee had purchased/sold the shares in question in the capacity of an investor and not in the capacity of a share trader and therefore, in the present case the income accrued from sale of the shares in question is required to be computed as capital gain and not as business income. - Decided in favour of assessee

Summary

Issues involved:
Challenge to assessment order treating income from shares as business income instead of capital gains.

Analysis:
1. The appeal was filed by the revenue against the order passed by the Ld. CIT(Appeals) for the assessment year 2010-11. The assessee, a Private Discretionary Trust, purchased shares over the years, which were eventually transferred to the trust. The trust's main objective was succession planning and wealth protection for family members.

2. The trust held shares of a pharmaceutical company for about 30 years, but due to market conditions, the value dropped significantly. To manage risk, the trust sold the shares and appointed Portfolio Managers for investment services. The trust declared its income in the return, which the AO assessed as business income instead of capital gains.

3. The Revenue challenged the CIT(A)'s order, arguing that the trust's activities were akin to business transactions due to multiple share transactions. The core issue was whether the income from share transactions should be treated as capital gains or business income.

4. The Tribunal examined if the trust acted as an investor or share trader, considering factors like fund utilization and engagement of Portfolio Managers. As the trust's intention was wealth preservation and succession planning for family members, the income was rightly treated as capital gains, not business income.

5. Citing precedents like Vinod K Nevatia Vs ACIT and Salil Shah Family Pvt. Trust vs. ACIT, the Tribunal emphasized that the trust's actions were in line with investment objectives, warranting the treatment of income as capital gains. The order passed by the CIT(A) was upheld based on evidence and legal provisions, dismissing the revenue's appeal.

6. The Tribunal's decision, pronounced on 13th January 2016, affirmed the treatment of income from share transactions as capital gains, dismissing the revenue's appeal.

This detailed analysis highlights the trust's investment activities, the dispute over income classification, legal precedents, and the Tribunal's decision upholding the treatment of income as capital gains.