Income tax - Whether gains made out of investment in shares through a portfolio management scheme are to be taxed only as business income - NO: HC
By TIOL News Service
NEW DELHI, MAY 03, 2014: THE issue before the Bench is - Whether gains made out of investment in shares through a portfolio management scheme are to be taxed only as business income. And the verdict goes against the assessee.
Facts of the case
The Assessee, a partnership firm, is engaged in the business of providing technical, marketing and maintenance services for earth mover, aircraft and truck tyres. It also trades in tyres. The AO, considered the gains realized by the assessee on sale of shares invested through a portfolio management scheme as business income, and not capital gains. The AO imitated penalty proceedings u/s 271(1)(c), the claim for rebate u/s 88E, as an alternative, was denied on the ground that no evidence of the Securities Transaction Tax paid was furnished. The CIT(A) concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income. The ITAT upheld the order of the CIT(A). The Tribunal also observed that the frequency of sale and purchase of shares indicated trading activity. Since the ITAT found that the gains were taxable as business income, the exemption of section 10(38) for LTCG for shares held longer than 12 months, as well as the claim for concession at the rate of 10% u/s 111A on STCG were both denied.
On Appeal before the HC the Assessee Counsel submitted that the transactions must be considered by themselves, while applying the tests to determine whether they are investments or adventure in the nature of trade. It was submitted that the PMS agreement, by its terms alone or by the fact of agency being handed over to the portfolio manager, cannot be the basis for inferring an intention to profit or that the transactions are in the nature of trade. The Revenue Counsel submitted that the fee paid to the broker was more than the return on the property, thus indicating that the portfolio management scheme itself was one intended to earn profit.
Having heard the parties, the HC held that,
++ 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. Nomenclature of a document or deed is not conclusive of what it seeks to achieve;
++ it is legally untenable to focus singularly on the intention or motive of the assessee without looking at the substantial nature of the transactions, in terms of their frequency, volume, etc. The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit. The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money. Along with the 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;
++ it is not contested that the source of funds of the assessee were its own surplus funds and not borrowed funds. A large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment. The number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions. Moreover, even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/purchased in those transactions. The ITAT erred in holding the transactions to be income from business and profession.
(See 2014-TIOL-628-HC-DEL-IT)
