|Ashwani Taneja (AM), Mahavir Singh (JM)
|28, 45, 48
|Business profits, investment, long-term capital asset, short-term capital gains, stock-in-trade
|January 25, 2017 (Date of pronouncement)
|January 28, 2017 (Date of publication)
|Click here to download the file in pdf format
|Entire law explained on whether gains from sale of shares held in a Portfolio Management Scheme (PMS) should be assessed as "capital gains" or as "business profits" in the context of CBDT Circular No. 4/7 dated 15.06.2007 and Circular No. 6 of 2016 dated 29.02.2016
(i) It is noted by us that major income of the assessee is income from sports endorsement and other shares. In addition to that assessee had made investment into shares. The entire investment has been made by the assessee out of its own funds. No amount of shares has been invested from any borrowing. Huge amount of dividend income has been earned by the assessee which is roughly 3.25 times of the amount of capital gain. The investment in shares with Portfolio Manager is merely to the extent of 4.8% of the total investments. The assessee has disclosed the amounts invested in the shares in the category of ‘investments’ right from beginning. The shares have never been revalued to bring them in line with the market value as would have otherwise been done in the case of stock-in-trade. The stock in trade is always disclosed at cost or market price which is lower. No such exercise has been done by the assessee in the case of shares since these have been held under the head of ‘investments’. It is also noted from the facts brought before us that in the case of short term capital gains average period of holding ranged between from 82 days to 123 days. It is not the case of the AO that shares have been purchased and sold on daily basis or without taking delivery and giving delivery. It is further noted by us that Ld. CIT(A) has rightly analysed the facts with proper reasoning to reach on the conclusion that conduct of the assessee and facts and circumstances of the case indicate that the assessee did not carry out the activity of making investment in shares as a systematic and organized activity of carrying out share trading or business.
(ii) In addition to the above, it is noted by us that though in the case of assessee before us, the shares have always been shown as part of investment in its Balance Sheet in all the past years consistently, but otherwise taxpayers have even been permitted to simultaneously carry out business of shares trading as well Investments into shares. The choice has been given to the taxpayers under the law that whether shares are to be kept by them as part of investment or stock-in-trade for the purpose of business. It is noted that Central Board of Direct Taxes by way of its circular No.4/7 dated 15-06-2007 clarified that an assessee can have two portfolios, i.e. one for investment purposes and the other for business purposes. The amount held in the investment portfolio would be assessable as income under the head ‘Capital gains’.
(iii) Our attention was also drawn on CBDT circular No.6 of 2016 dated 29-02-2016 wherein the Board gave further guidelines with regard to the treatment of profit as arising on sale / purchase of shares. It was inter-alia observed in the circular that the AO shall take into account the following guidelines in deciding whether the surplus generated from sale of listed shares or other securities would be treated as capital gains or business income
(iv) Thus, from the perusal of the above said circulars, i.e. circular No.4/2007 and circular No.6/2016, inter-alia, following points can be noted:-
(a) An assessee can have even two portfolios, i.e. investment and business;
(b) The assessee has choice of deciding whether the shares are purchased in investment portfolio or business portfolio. Once a particular decision is taken by the assessee, then he is obliged to follow the same in all subsequent years; it would in turn mean that AO shall also be bound to follow consistent approach;
(c) CBDT also wants reduction in litigation and maintaining the consistency by the Revenue as well as by the assessee in approach followed on the issue of treatment of income derived from sale of shares.
(v) Thus, from the above, it is clear that the as per law initial choice was with the assessee that whether initial amount invested in the shares was to be treated as part of ‘investments’ or ‘stock-in-trade’. The assessee exercised its choice and kept the same as part of ‘investments’. It is well settled law that a tax payer can very well plan it’s affairs in such a manner so as to minimize the burden of tax so long as no mala fide or bogus practices are followed and tax planning is done by the assessee strictly within the framework of law.
(vi) We have analysed this issue from another perspective also. The income arising on account of sale -purchase of shares if assessed under the head of capital would of course be taxable at relatively lower rate of tax and is also exempt in some cases, as compared to the business income which is taxable at relatively higher rate of tax. But, if such income is assessable under the head income from business then the assessee would be entitled for claim of set of expenses incurred in the normal course of business to earn such income and the tax would be payable only on the amount of net profit. Therefore, while drafting the provisions the legislature did not make any water tight rule for determination of nature of income arising from purchase and sale of shares to be assessed under the head of capital gains or business income. It has been left upon the wisdom of the assessee and facts and circumstances of the case. Under these circumstances, if assessee has chosen a particular course after deciding all the pros and cons of both the options available to it and if the choice has been exercised in a bonafide manner, the Board has advised as discussed above that the AO does not have liberty under the law to thrust his opinion upon the assessee, so long as the assessee follows his choice on consistent basis.
(vii) Turning back to the facts of the case before us, it is apparent that the assessee had adopted a particular course. He explicitly categorised the amount invested in shares as part of ‘investments’ and not as part of ‘stock-in-trade’. In our considered opinion, AO’s allegation that assessee did not make ‘investment’ into shares but carried it out as business activity merely relying upon factors like volume or frequency of transactions alone, was not in accordance with law and facts of this case.
(viii) Further, the AO had relied upon the judgment of Delhi Bench ITAT in the case of Radial International (supra) to hold that gain arising on sale of shares by availing services of Portfolio Manager shall amount to business income. In this regard it has been brought to our notice that the aforesaid decision has been reversed by the Hon’ble Delhi High Court in its order passed on 25th April 2014 reported in 367 ITR 1 (Delhi) wherein it has been held by their lordships after considering entire scheme of PMS as well as provisions of law that categorization of the transactions whether giving rise to business income or income from capital gains would not necessarily be depending upon the fact that whether purchase and sale of shares are done with the help of Portfolio Manager or not. It was held that PMS agreement is mere agreement of agency and cannot be used to infer any intention to make profit. Similarly, in the case of CIT v. Kapur Investments P. Ltd. 61 taxmann.com 91 Hon’ble Karnataka High Court had adopted the similar view following the aforesaid judgments of Hon’ble Delhi High Court
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2. Nalini Navin Bhagwat (53/Mum/20 10) Mumbai
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4. ARA Trading (13 Taxrnann.com 20) Pune
5. Apoorva Patni (54 SOT 9) Pune
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7. Janak S Rangwala (11 SOT 627) Mumbai