Income Tax Appellate Tribunal - Mumbai
Samir Sevantilal Shah, Mumbai vs Department Of Income Tax on 19 November, 2012
ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before Shri B. Ramakotaiah, Accountant Member
and Shri Vijay Pal Rao, Judicial Member
ITA No.8235/Mum/2010
(Assessment year: 2007-08)
Income Tax Officer (I.T.)2(1) Vs. Samir Sevantilal Shah,
room No.014, Scindia House, 53 Hatkesh Society, Shalib
Ballard Pier, Building, 2nd Floor, NS Road
Mumbai 400008 No.7, JVPD Scheme, Near
Jamunabai High School, Vile
Parle (West) Mumbai 400056
PAN: ACEPS 6596 H
(Appellant) (Respondent)
ITA No.8236/Mum/2010
(Assessment year: 2007-08)
Income Tax Officer (I.T.)2(1) Vs. Salil Sevantilal Shah,
room No.014, Scindia House, 53 Hatkesh Society, Shalib
Ballard Pier, Building, 2nd Floor, NS Road
Mumbai 400008 No.7, JVPD Scheme, Near
Jamunabai High School, Vile
Parle (West) Mumbai 400056
PAN: ACEPS 6597 G
(Appellant) (Respondent)
Department by: Shri Shri Mahesh Kumar &
Ms. Neeraja Pradhan, DR
Assessee by: Shri Sushil Lakhani
Date of Hearing: 19/11/2012
Date of Pronouncement: 27/11/2012
ORDER
Per Bench:
Both these appeals pertain to Non-Resident Indians (NRI) for the assessment year 2007-08 with reference to the capital gains declared by the resepctive assessees. The assessees are based in Thailand and has shown short term capital gain of `.56,81,967 Page 1 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah under section 111A of the Income Tax Act, in the case of Salil Seventilal Shah and `.40,38,474 under section 111A of the Income Tax Act in the case of Sameer Seventilal Shah. AO treated the same as income from business, whereas the CIT (A) following the findings in assessment year 2006-07 which were confirmed by the ITAT, deleted the same as a covered issue.
2. Briefly stated, assessees are residents in Thailand and have been investing in Indian Share Market through the portfolio investment scheme mainly by making applications in the IPOs. Assessees being NRIs were not permitted under the RBI guidelines to trade in shares and only investment was allowed. However, AO was of the opinion that considering the frequency of the transactions assessee has indulged in trading of the shares and therefore, the income earned therein has to be assessed as business income. He also considered, as assessee has given power of attorney to his father, the father has to be considered as agent PE and in the alternate the brokers from whom he is getting advises were to be considered as agent PE. These issues were elaborately discussed in assessment year 2006-07 and the learned CIT (A) after analyzing the pattern of the investment, restrictions placed on NRIs for trading in shares in India and also examining the role of father and the broker held that assessee has no PE in India under Indo- Thailand DTAA and further assessee being an investor, made out of surplus funds, the gains should be taxed only as capital gains.
3. AO while accepting the CIT (A) has held against the Revenue in assessment year 2006-07, however completed the assessment in the same manner in this year also as the matter was pending before the ITAT at the relevant point of time. As stated briefly above, the learned CIT (A) following the order of the ITAT in ITA Nos.3229 & 3230/Mum/2009 dated 7.9.1020 directed AO to treat the income of assessees as short term capital gains, the Revenue is aggrieved.
Page 2 of 12ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
4. The Revenue has raised the common grounds as under:
"1. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in holding that the profit arising out of purchase and sale of shares were assessable as "Capital Gain" and not as "Business Income".
2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in holding that Shri Sevantilal S. Shah, father of assessee does not constitute the agency PE in India.
3. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in holding that M/s Sushil Finance Consultants Ltd do not constitute the agency PE as per India-Thailand DTAA".
5. After considering the rival submissions, we are of the opinion that there is no need to disturb the findings of the CIT (A) in this year. The matter was elaborately discussed by the ITAT in assessment year 2006-07, the findings of which are equally applicable on the facts of this case. The findings of the ITAT on the issue of treating capital gain as business income by AO are as under:
"11. We have considered the rival submissions carefully and agree with the submissions of the Learned Counsel of the assessee. First of all assessee is already engaged in full time business of manufacture and sale of jewellery in Thailand and has invested only the surplus money in the Indian share market. It has not been denied that substantial portion of such money was invested through public issues i.e. IPO. Normally a trader in shares would not make application through IP0s and wait for sometime for allotment which is generally very long and then hold the shares and wait for a particular price. In the case before us, though it was admitted by the Learned counsel of the assessee, that the transactions were frequent but the reasons have also been explained because it was a unique phase of booming market and the target price reached very fast and assessee sold his holdings in smaller lots so as to take the benefit of the rising market. Secondly, assessee has not borrowed any money and invested his own Page 3 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah funds and quite a substantial amounts of investments are there which has been noted by the ld. CIT(A) as under:
30-03-2004 Rs.3.38 crores
31-03-2005 Rs.1.82 crores
31-03-2006 Rs.5.50 crores
31-3-2007 Rs.7.59 crores
12. One of the most important aspects in favour of the assessee is that the assessee is a NRI and as such not allowed to trade in shares in view of the RBI regulations. Assessee could have possibly invested in 12 shares and that too through portfolio investment schemes through certain authorized dealers. In the case of Fidelity North Star Funds & Others In-Re [supra] following questions were raised-
(i). whether profits from the sale of portfolio investments in India will be treated as business income;
(ii). whether the applicant could be regarded as having a permanent establishment in India'
(iii) If the income is found to be in the nature of business income whether the applicant will be taxable in India;
and (iv) whether the income from the portfolio investments would be taxable in India at the fixed rate of 20 per cent under section 115AD of the Income Tax Act, 1961.
And the answers given by the authorities are as under:
"(i) That the transactions were only in the nature of investment in capital assets to earn capital gains because"
(a) the whole scheme meant for FIIs was to invest in securities in India to receive income from them so long as they hold the same and realize capital gains on their transfer.
(b) the expression "Income received in respect of securities" in cl. (a) connotes the income therefrom when the securities held by a FII are intact, e.g. dividends, interest, etc. like fruits from a tree or a rent from an Page 4 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah immovable property. The term ' income ' employed therein, having regard to the context, can, by no stretch of imagination, be assumed as income arising from the transfer of such securities for the simple reason that such type of income is referred to in cl. (b) where the income is specified as being by way of short-term and long-term capital gains arising from the transfer of such securities. It was against deduction of expenditure such as by way of salary of the staff, etc., expenditure in obtaining loans and paying interest thereon that Parliament guarded, by providing in clause {a} of section 115AD(2) that no deduction shall be allowed in computing income in respect of securities referred in clause [a] of sub-section [1].
(c) The plethora of legislative provisions unmistakably pointed out that an FII was not registered for carrying on trade in securities; it could only invest in securities for the purpose of earning income by way of dividends and interest and realizing capital gains on their transfer. Trading in securities by a FII was prohibited.
(d) It would be preposterous to impute an intention to FIIs, who responded to the offer of investment in securities in response to the guidelines, got themselves registered under the SEBI Regulations and undertook to abide by those regulations that they would, in the very first step itself, have intended to violate all the legislative requirements which provided them the opportunity to enter the capital market in India.
(ii) That therefore, the question did not require any ruling.
There is no scope for reading the SEBI [Foreign Institutional Investors] Regulations, 1995, as permitting trading in securities. The expression "or otherwise deal in" in regulation 3(1) means other than buying and selling, e.g. lending/borrowing permitted under regulation 15(8). It cannot be understood to mean doing business in securities because trading itself involves buying and selling and if it is construed to mean the expression becomes otiose. Regulation 15A of SEBI Regulations permits dealing in offshore derivative instruments only and none other. The words "transact business" and the "transaction of business" in clauses Page 5 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
(a) and (c) respectively of sub-regulation (3) of regulation 15 postulate transaction of sale and purchase, they do not refer, as such, to the trading activity. Transacting business is different and distinguishable from carrying on business. Transact business is a general term which refers to carrying on all types of activities whereas business transaction refers to only commercial trading activities. These words and expressions, in the context in which they are used, do not deal with the subject of trading in securities much less do they permit activities of trading in securities by a FII.
In the case before us also the RBI has issued the following directions which have been intimated to the assessee by HDFC Bank through their letter which has been filed before us.
"NRIs/OCBs have to take delivery of the shares/convertible debentures and give delivery of the shares/convertible debenture sold under the scheme and are not allowed to trade."
The above clearly shows that when as per the SEBI regulations [in the case before us RBI regulations] the assessee was not permitted to do in trading then gains received from sale and purchase of shares can be only taxed as capital gains.
13. We further find that Hon'ble Bombay High Court in the case of Gopal Purohit [supra] has held that though the principles of res judcata is not attracted because each assessment year is separate entity, but there ought to be some uniformity in treatment and consistency when the facts and circumstances are identical. In the case of the assessee in the earlier years also share income was held be on account of capital gains. Under these circumstances , we are of the view, that the ld. CIT(A) has correctly held that profits received by the assessee on account of sale and purchase of shares are to be treated as income from capital gains and accordingly we confirm his order".
6. On the issue of 'Agency PE' the detailed findings are as under:
"23. We have considered the rival submissions carefully and find force in the submissions of the ld. counsel of Page 6 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah the assessee. We wonder as to why the AO has not brought the out come of the enquiry conducted with Mr. Amol Joshi, Client Relationship Manager of M/s Sushil Finance Consultancy Ltd, on record. The ld. DR has not denied of such enquiry, but at the same time he has not brought the out come of the enquiry to our notice. In any case, we fail to understand that simply by stating that Mr. Amol Joshi was tracking the price movements of the shares and was advising the clients to make the share broker of the assessee as his PE. The movements in share prices can be monitored by anybody in the world by opening any commercial TV channel or internet services. As far as the advice is concerned, merely if broker is advising the client regarding certain shares, then it cannot be said that such broker is also taking business decisions on behalf of the assessee. No fixed place or exclusive person was provided for assessee to conduct his business. It has been observed by the Special Bench of the Tribunal in the case of Motorola Inc. vs. DCIT [supra], that simply because certain employees were allowed to visit the facilities locally, it cannot be said that assessee had at its disposal as a matter of right certain places which could be characterized as fixed place of business in terms of Article 5.1. It was also stated that portfolio investment services were provided to the assessee by BNP Paribas and under those guidelines only assessee was making investments. But even if the broker was giving certain advices, we are of the view that it would not make the broker as PE of the assessee. it is also to be noted that clause [4] of Article 5 which has been invoked by AO specifically excludes broker and general commission agent from being considered as an agent.
24. As far as PE in the form of father is concerned, Article 5 of the DTAA with Thailand reads as under:
"Article 5 Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.Page 7 of 12
ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
2. The term "permanent establishment" shall include:
(a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, a quarry, an oil or gas well or other place of extraction of natural resources
(g) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on;
(h) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for the same or a connected project for a period or periods aggregating more than 183 days; (i) a warehouse, in relation to a person providing storage facilities for others; (j) the furnishing of services, including consultancy services, by a personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days.
3. Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include:
(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or deli very;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.Page 8 of 12
ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
4. Notwithstanding the provisions of the preceding paragraphs a person (other than a broker, general commission agent or any other agent of an independent status to whom paragraph 5 applies) acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned Contracting State, if:
(a) he has and habitually exercises in the first-
mentioned Contracting State in authority to conclude contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise;
(b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise belonging to that enterprise from which he regularly delivers goods or merchandise on behalf of the enterprise; or
(c) he habitually secures orders in the first-mentioned State wholly or almost wholly for the enterprise or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it.
5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. This shall not apply if such broker or agent carries on in that other State an activity descripted in paragraph 4 wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises which are controlled by or have a controlling interest in it.
6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not, of itself, constitute either company a permanent establishment of the other.
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7. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establishment in the other State if it collects premiums in the territory of that State or insures risks situated therein through an employee or through a representative who is not an agent of an independent status within the meaning of paragraph 5 of this Article."
The AO has invoked clause [4] and clause [4] clearly states that a person who is acting on behalf of an enterprise shall be deemed to be PE of the assessee. But nothing has been brought on record by AO as to how the father of the assessee acted on behalf of the assessee. In fact, as observed earlier, enquiries made with Mr. Amol Joshi have not been brought on record. Further an affidavit in the form of Annexure-6 was filed and various averments read as under:
i. I am father of Mr. Samir S. Shah [hereinafter referred to "Samir"] having PAN ACEPS 6596. R, who is presently settled at Bangkok, Thailand.
ii. I am retired since 21 years (Twenty one year). Till retirement I was employed as Assistant Manager with Champion Engineering Mumbai, post retirement, I am pursuing my hobby of painting.
iii. Though for convenience sake, my son Samir has given me a General Power of Attorney, I have so far not used this power of Attorney for any transactions in stock market relating to my son Samir.
iv. Without prejudice to the generality of the above, I confirm that I have not bought or sold any shares on the stock market on behalf of my son Samir.
v. Being one of the authorised signatory of Samir's Bank A/c. No.0011220003572 with HDFC Bank Ltd, Tulsiani Chambers, Nariman Point, Mumbai 400021. I have at times only signed cheques under instruction of my son Samir in favour of his share Brokers for the amounts instructed by my son Samir. vi. Whatever stated herein above is true and correct to the best of our knowledge Page 10 of 12 ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah belief and information and nothing has been concealed herein.
From above averments it was made clear that assessee's father was 76 years old and was a retired person. He has not acted on behalf of the assessee. This has not been rebutted by the department. If AO had any material he should have called Mr. Sevantilal S. Shah and examined him. But nothing like that has been done to prove that assessee's father constituted PE. Occasionally he might have signed cheques and that itself would not construe him as PE of the assessee. As the ld. DR has referred to the question raised by the AO that how the payments were received and paid through the broker, how the shares were delivered, we had called for the bank statements as well as copies of the demat account. A perusal of the bank statements show that as far as sale proceeds are concerned, they have been directly credited to the assessee and no cheques as such have been issued by the brokers. Some of the credit proceeds have been used for purchase of shares, but at times cheques have also been paid on behalf of the assessee. As far as movement of share price is concerned, it is a matter of common knowledge that whenever shares are purchased, then same are automatically credited by the broker to demat account of the purchaser once the payments are received. Normally delivery has to be given when the shares are sold, but in the case before us it was pointed out that auto-pay-in instructions were issued. Therefore, there is no material on record to show that assessee's father was regularly executing the contracts on behalf of the assessee and receiving the payments and/or receiving shares. In these circumstances, in our view, he cannot be called PE of the assessee.
Therefore, grounds Nos.2 & 3 of the revenue's appeal are dismissed".
7. In view of the findings of the Coordinate Bench in assessee's own case in assessment year 2006-07 with which we agree, there is no merit in Revenue grounds. Accordingly grounds are rejected.Page 11 of 12
ITA No. 8235 & 8236 of 2010 Samir & Salil Seventilal Shah
8. In the result, both the appeals filed by the Revenue are dismissed.
Order pronounced in the open court on 27th November, 2012.
Sd/- Sd/-
(Vijay Pal Rao) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated November, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "L " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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