2016 (10) TMI 422 - AT - Income Tax

Income accrued to the assessee from sale of shares - Short term capital gains or business income - Held that - The AO and the ld. DR have not controverted this fact that the assessee made investments in shares/securities in ING Vyasa Bank to act as portfolio investment banker and no investment has been made directly by the assessee in the nature of business adventure in the nature of trade. We may also point out that as per the ratio of the decision of the Hon ble High Court of Delhi in the case of Radials International 2014 (5) TMI 18 - DELHI HIGH COURT the intention of the assessee must be inferred holistically from the conduct of the assessee, circumstances of the transactions and not just from seeming motive at the time of depositing money. Their Lordships held that intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade. Lastly, their Lordships held that the block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade and if the transactions entered into by the assessee are through portfolio banker are not adventure in the nature of trade, then the same should be treated as investment and income accrued therefrom has to be taxed either as long term or short term capital gains. Accordingly, the sole ground raised by the assessee is allowed and the AO is directed to treat the income accrued to the assessee from sale of shares through portfolio manager as income from long term /short term capital gain.

Summary

Issues involved:
1. Whether the short term capital gains should be treated as business income or as capital gains for assessment year 2008-09.

Detailed Analysis:
1. The appeals were filed by the assessee and his wife against separate orders of the CIT(A)-XXIX, New Delhi for AY 2008-09. The appeals pertained to the same group of assessees and were heard together. The main issue raised by both assessees was the treatment of short term capital gains as business income. The husband, Shri Kamal Shiv Kumar, argued that the CIT(A) erred in upholding the AO's decision to treat the short term capital gains as business income. The husband's representative highlighted the average holding period of shares, number of transactions, and intention to earn capital gains rather than conduct a business. The representative also referred to Circular No. 6/2016 of CBDT and relevant case laws to support the argument that the income should be treated as capital gains, not business income.

2. The Departmental Representative (DR) defended the AO's decision, stating that the intention of the assessee was to earn a profit from the purchase and sale of shares as a trade adventure. However, the DR could not refute the Circular No. 6/2016 supporting the assessee's case. The husband's representative countered by pointing out the non-resident status of the assessee, the power of attorney given to a bank for investment, and the proposition from the High Court of Delhi regarding the treatment of income from investments. The Tribunal considered the arguments and relevant material on record, emphasizing the assessee's option to treat shares as stock in trade or investments, as per CBDT Circular. The Tribunal noted that the assessee, a non-resident Indian, used surplus funds for investments and gave power of attorney to a bank for portfolio management, aligning with the High Court's decision that such investments should be treated as capital gains, not business income.

3. The Tribunal analyzed the terms of the Portfolio Management Services (PMS) agreement and the intention of the investor to make profits. It was observed that the agreement indicated limited liability and investment on behalf of the investor without a guarantee of appreciation. The Tribunal emphasized that the intention to trade for profit must be evaluated holistically from the conduct of the assessee and other transactional factors. The Tribunal concluded that the income from the sale of shares through the portfolio manager should be treated as income from long term or short term capital gains, based on the nature of the transactions. The same decision was applied to the wife's case, as the circumstances were identical to the husband's case.

4. Ultimately, the Tribunal allowed the appeals of both assessees, directing the AO to treat the income from the sale of shares through the portfolio manager as income from long term or short term capital gains. The judgment was pronounced on 26.08.2016.