Share STCG not become business income by employment of Portfolio Management Service (PMS) for investment in shares-ITAT held so relying on 2 HC Judgments

Share STCG not become business income by employment of Portfolio Management Service (PMS) for investment in shares. This was held in a recent judgment by ITAT placing reliance on two High Court’s verdicts.

ABCAUS Case Law Citation:
938 2016 (06) ITAT
Date of Judgment: June, 2016

Brief Facts of the Case:
Assessee was a consulting physician doctor. His return of income for AY 2006-07 was selected for scrutiny. During the course of assessment proceedings, the AO  noticed that the assessee had shown income from Short Term Capital Gain (STCG) of Rs.11,45,160/- and Long Term Capital Gain (LTCG) of Rs.3,37,983/-. The assessee had made 372 transactions of purchase and sale of shares from which he had earned STCG. The AO therefore concluded that the assessee had indulged in frequent selling of shares throughout the year with the motive of earning profits and assessee has also indulged in trading in Future and Options from which he suffered a loss of Rs.1,92,301/-. The submission of the assessee was that the transactions through Portfolio Management Scheme (PMS) cannot be considered as business transactions was not accepted by the AO according to whom the assessee had placed the funds at the disposal of the PMS for the purpose and purchase of sale of shares on his behalf with the sole intention on earning quick profit by utilising the skills on the PMS Managers. He, therefore, considered the STCG as business income of the assessee.

Aggrieved by the order of the AO, assessee carried the matter before the CIT(A) who upheld the order of the AO holding that assessee failed the tests of the number of transaction, frequency of transaction, quantity of shares transacted, value of transactions as laid down by Gujarat High Court in the case of CIT vs. Rewashanker A Kothari 

Aggrieved by the order of the CIT(A), the assessee approached ITAT.

Contentions of the Appellant Assessee:
The assessee argued that in earlier years and in subsequent years, the profit earned was offered by assessee as capital gains and was also accepted by the Revenue. Regarding the issue of employment of PMS for making investments by the assessee for maximizing profits it was contended that in view of the judgement of Karnataka High Court in the case of CIT-Bangalore vs. Kapur Investments (P) Ltd. reported at (2015) 61 taxmann.com 91 (Karnataka) and the judgement of Delhi High Court in the case of Radials International vs. ACIT reported at (2014) 367 ITR 01 (Delhi) it can not be considered as business income.

Important Excerpts from ITAT Judgment:

……. The issue in the present case is about the treatment of profits earned on sales of shares. It is an undisputed fact that the assessee earned profit on sale of shares and it is also a fact that assessee has availed the services of Portfolio Managers for purchase and sales of shares and the act of the assessee of engaging the PMS and the profits earned therefrom has been considered to be a part of business of the assessee by the ld.CIT(A). We find that Hon’ble Karnataka High Court in the case of CIT-Bangalore vs. Kapur Investments (P) Ltd.(supra) after relying on the decision of Hon’ble Delhi High Court in the case of Radials International vs. ACIT[supra] has held that the Portfolio Management Services (PMS) cannot be termed as business of the assessee. The relevant observation of the Hon’ble Karnataka High Court is 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. Detailed 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 returns) 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.”

We further find that it is assessee’s contention that the profits earned on sale of shares in previous and subsequent assessment years has been considered by assessee as capital gains and has been accepted by the Revenue. The aforesaid contentions of the assessee has not been controverted by the Revenue. Before us also, no contrary binding decision in its support has been placed by Revenue. Further Revenue has also not pointed out any distinguishing feature in the case of CIT vs. Kapur Investments Pvt.Ltd.(supra) and the facts of the present case. In view of the aforesaid facts and respectfully following the ratio laid down by the Hon’ble Karnataka High Court in the case of CIT vs. Kapur Investments Pvt.Ltd.[supra], we are of the view that the profit earned by the assessee on sale of shares is to be treated as capital gains and not as business income of the assessee. 

Shares STCG not become business income by PMS employment

Download Full Judgment

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