Income Tax Appellate Tribunal - Delhi
Sh. Amit Jai Bhalla, New Delhi vs Acit, New Delhi on 30 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.1975/Del/2014
Assessment Year : 2008-09
Amit Jai Bhalla, ACIT, Circle- 31(1),
116, Bhalla House, Jorbagh, New Delhi.
Vs.
New Delhi.
PAN : AHLPB3132C
(Appellant) (Respondent)
Assessee by : Shri Hiren Mehta, CA
Department by : Shri R. C. Danday, Sr.DR
Date of hearing : 22-08-2017
Date of pronouncement : 30-08-2017
ORDER
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 17.01.2014 of CIT(A)-XXVIII, New Delhi relating to assessment year 2008-09.
2. The assessee in his only effective ground of appeal has challenged the order of the CIT(A) in upholding the action of the Assessing Officer in treating the short term capital gains from sale of shares/ mutual funds earned through Portfolio Management Services as income from business.
3. Facts of the case, in brief, are that the assessee is an individual and derived income from salary, income from house property, income from capital gain and income from other sources. He filed his return of income on 2 ITA No.1975/Del/2014 31.07.2008 declaring taxable income at Rs.39,14,770/- which included long term capital gains of Rs.16,40,913/- and short term capital gain of Rs.22,26,492/-. During the course of assessment proceedings, the Assessing Officer asked the assessee to explain the capital gains declared by him by filing the details of sales and purchase of shares and mutual funds etc. It was explained by the assessee that he has shown the said shares/ mutual funds as investment in his books of account which were valued at cost and not at the lower of cost or market price whichever is less, thus treating the same as investment. It was explained that the investment is to earn dividend income and the corresponding dividend earned has been disclosed in the tax return. It was further argued that the assessee has not dealt with in the said securities/ funds and has parked his funds with the fund management companies namely Kotak and Societe General. The said companies were purchasing and selling the shares on behalf of the assessee. It was reiterated that no funds have been borrowed for investing in the securities/funds and accordingly there is no interest cost. The assessee has utilized his surplus funds with an object to earn dividend income.
4. However, the Assessing Officer was not satisfied with the explanation given by the assessee. Referring to CBDT Instruction No.1827 dated 31.08.1989 and Circular No.4/2007 dated 15.06.2007, the Assessing Officer 3 ITA No.1975/Del/2014 examined the magnitude of purchase and sales and frequency of transactions, period for which the shares were held i.e. holding period and the motive of the assessee. After going through the various details filed by the assessee and relying on various decisions, the Assessing Officer came to the conclusion that the assessee was indulging in trading of shares with a view to make profit from trading of shares which is in the nature of business activity. He, therefore, treated the income of Rs.22,26,492/- as business income as against short term capital gain claimed by the assessee.
5. Before the ld. CIT(A), the assessee strongly objected to the action of the Assessing Officer in assessing the short term capital gain of Rs.22,26,492/- as business income. It was argued that in earlier years profit on sale of shares and securities had been assessed as capital gain and not as business income. It was submitted that the assessee is investing in shares and securities through Portfolio Management Services (PMS) and no personal skills, time and decision making is involved as is required in the case of a business activity. The purpose of the investment is capital appreciation and not to earn dividend income. Further, no borrowed funds have been utilized for investing in the securities/ funds through PMS and accordingly there is no interest cost. Relying on various decisions, it was argued that the Assessing Officer is not justified in treating the income as income from capital gain as business income.
4ITA No.1975/Del/2014 5.1 However, the CIT(A) was also not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer in treating such short term capital gain as business income. While doing so, he also relied on CBDT Instruction No.1827 dated 31.08.1989, CBDT Guidelines dated 13.12.2005 and Circular No.4/207 dated 15.06.2007. He relied on various decisions including the decision of the Hon'ble Delhi High Court in the case of CIT vs. Avinash Jain reported in (2013) 214 Taxman 260 and the decision of the Hon'ble Supreme Court in the case of P. M. Mohammed Meerakhan vs. CIT reported in (1969) 73 ITR 735 (SC). According to him, the quantum of transaction entered into by the assessee shows that the dominant intention of the assessee in purchasing the shares is not investment but business. The assessee has not purchased shares with the intention of earning dividend income or holding them but to immediately earn short term profit. He accordingly upheld the action of the Assessing Officer in treating the income from sale of shares/mutual funds as business income as against the certain capital gain declared by the assessee.
6. Ld. counsel for the assessee strongly objected to the order of the CIT(A). He submitted that the Assessing Officer is not consistent in his approach. While a part of the income which was declared as long term capital gain has been accepted by him, however, he deviated from his action while treating the short 5 ITA No.1975/Del/2014 term capital gains as business income. Referring to the details of gain in shares through PMS transactions on the basis of period of holdings, the ld. counsel for the assessee submitted that such investments through the PMS is very negligible as compared to the volume of transactions. Referring to the decision of the Hon'ble Delhi High Court in the case of Radials International vs. ACIT reported in 55 tamann.com 106 (Delhi), he submitted that the Hon'ble High Court in the said decision has held that where 71 per cent of total shares invested through a portfolio management scheme had been held for a period longer than six months, profit arising there from was to be treated as capital gains and not as business income. Referring to the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Kapur Investments (P.) Ltd. reported in 234 Taxman 149, he submitted that the Hon'ble High Court in the said decision has held that the excess borrowed funds lying with assessee can always be invested in shares for earning higher returns or through professionally managed Portfolio Management Scheme and in such circumstances it would not mean that assessee was carrying on business of investment in shares. He also relied on the following decisions :-
(i) Janak S Rangwalla vs. ACIT reported in (2007) SOT 627 ITAT Mumbai.
(ii) DCIT vs. K. B. Capital Markets (P) Ltd. reported in (2016) 71 Taxmann 354 ITAT Kolkata.
(iii) ACIT vs. Sachin R Tendulkar (2017) 77 Taxmann 305 ITAT Mumbai.6 ITA No.1975/Del/2014
7. He further submitted that in the preceding year, the Assessing Officer has accepted such capital gain as declared by the assessee and it has not been held as business income. Further, the assessee has not borrowed any funds and no interest expenditure has been incurred for investing in shares. Under these circumstances, the Assessing Officer was not justified in treating the short term capital gain is business income.
8. Ld. DR, on the other hand, heavily relied on the order of the CIT(A) and Assessing Officer. He submitted that in view of the CBDT Circular and Instruction (supra) the Assessing Officer has correctly treated such income from short term capital gain as business income and the CIT(A) has rightly upheld the action of the Assessing Officer. He accordingly submitted that the order of the CIT(A) be upheld and the ground raised by the assessee be dismissed.
9. We have heard the rival arguments made by both the sides, perused the orders of the CIT(A) and the Assessing Officer and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute to be adjudicated is regarding the treatment of the gain from investments in shares and mutual funds through PMS service provider as short term capital gains or business income. From the various details furnished by the assessee, we find the assessee has earned profit of Rs.22,26,492/- from sale of shares and mutual funds through PMS. The 7 ITA No.1975/Del/2014 submissions of the ld. counsel for the assessee that no borrowed funds have been utilized for investment in those shares and mutual funds and, therefore, no interest expenditure has been incurred could not be controverted by the ld. DR. Further, the submissions of the ld. counsel for the assessee that in the preceding year also such short term capital gain was accepted by the Assessing Officer also could not be controverted by the ld. DR. A perusal of the assessment order shows that the Assessing Officer has accepted the long term capital gain declared by the assessee and he has treated the gain from sale of shares and mutual funds held for less than one year as business income as against short term capital gain declared by the assessee. We find the Hon'ble Delhi High Court in the case of Radials International (supra) while adjudicating an identical issue has held that where 71 per cent of total shares invested through a portfolio management scheme had been held for a period longer than six months, profit arising there from was to be treated as capital gains and not as business income. While doing so, the Hon'ble High Court had considered the decision of the Hon'ble Supreme Court in the case of P. M. Mohammed Meerakhan (supra) which has been relied on by the ld. CIT(A). In the said decision, the Hon'ble High Court has held that the intention of an assessee must be inferred holistically from the conduct of the assessee, the circumstances of the transactions and not just from seeming motive at the time of depositing the 8 ITA No.1975/Del/2014 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. The Hon'ble High Court at para 22 and 23 of the order has observed as under :-
"22. It is clear thus, that about 71 per cent of the total shares have been held for a period longer than 6 months, and have resulted in an accrual of about 81 per cent of the total gains to the assessee. Only 18 per cent of the total shares are held for a period less than 90 days, resulting in the accrual of only 4 per cent of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment. This Court is not persuaded by the argument of the Revenue that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year. This is because 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.
23. This Court is thus of the opinion that the learned Income-tax Appellate Tribunal erred in holding the transactions to be income from business and profession. The order of the Income-tax Appellate Tribunal is consequently set aside and the appeal is answered in favour of the assessee."
10. We find the Hon'ble Karnataka High Court in the case of Kapur Investments (P.) Ltd. (supra) has held that merely because excess borrowed funds lying with assessee were invested in shares for earning higher returns or through professionally managed Portfolio Management Scheme; it would not mean that assessee was carrying on business of investment in shares. Relying on various decisions, the Hon'ble High Court held that investment through Portfolio Management Service, which may deal with the shares of the assessee 9 ITA No.1975/Del/2014 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. The relevant observations of the Hon'ble High Court at para 10 and 11 of the order read as under :-
"10. As regards the first question that merely because of employment of Portfolio Management Service for investment in shares, the same would become business income, we are of the opinion that the said issue has been dealt with at length by the Delhi High Court in the case of Radials International (supra), wherein, in similar facts, the question has been answered in favour of the assessee and against the Revenue. Details reasons for the same have been given in the said judgment with which we concur. Even otherwise, it is admittedly not a case where the assessee had engaged its own persons or had a separate business infrastructure to carry out its share transactions for the purpose of business. It is merely a case where the assessee has invested funds through the Portfolio Management Service.
11. In our opinion, 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 return) 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."
11. The various other decisions relied upon by the ld. counsel for the assessee also support his case. In view of the above discussion and in view of the fact that the Assessing Officer has accepted the long term capital gain declared by the assessee in this year and in the preceding year he has accepted short term capital gain as declared by the assessee, therefore, we set-aside the order of the CIT(A) and direct the Assessing Officer to accept the short term capital gain as 10 ITA No.1975/Del/2014 declared by the assessee. The ground raised by the assessee is accordingly allowed.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on this 30th day of August, 2017.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 30-08-2017.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The CIT
4) The CIT(A)
5) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi