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.
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.
EXTRACT OF THE JUDGMENT
These appeals pertain to same assessee for the two different years involving identical issues, therefore, these were heard together and being disposed of by this common order:
2. During the course of hearing, arguments were made by Shri Jitendra Jain, Authorised Representatives (AR) on behalf of the Assessee and by Shri TA Khan, Departmental Representative (DR) on behalf of the Revenue.
3. First we shall take appeal for A.Y. 2010-11 filed by the Revenue against the order of Ld. CIT(A) dated 27.02.20 14 passed against the assessment order of the AO u/s 143(3) dated 15.02.20 13 for A.Y. 2010-11 on the following grounds:
1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in holding that the income on account of sale of shares and Mutual funds is Long Term Capital Gain or Short Term Capital Gain and not Business income.”
2. “On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the disallowance u/s 14A r. w. Rule 8D of Rs. 76,55,8411- by holding that the Assessing Officer (A.O.) has not recorded in the order as to how in regard to the accounts, the A. O. was satisfied with the correctness of the claim of the assessee in order to prove that the expenses
3. “The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored.”
4. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
4. Ground No.1: In this ground, the Revenue is aggrieved with the action of Ld. CIT(A) in reversing the action of AO in treating the gain arising on sale of shares as ‘business income’ which was shown by the assessee as assessable under the head income from ‘capital gains’.
5. The brief background and facts of the case as culled out from the orders of the lower authorities are that during the course of assessment proceedings it was noted by the AO that the assessee had shown in its return of income long term capital gains and loss on sale of shares for Rs.85.56 lakhs and Rs.23.82 lakhs respectively. Further, short term capital gains of Rs.90.89 lacs and short term capital loss of Rs.7.78 lacs was also shown in the return filed by the assessee. It was noted by the AO that assessee has been disclosing capital gain from sale of shares every year in past and that purchase1sale of shares and units of mutual funds was managed by Portfolio Managers such as Kotak securities and DSP Merril Lynch (herein after called as PMS). It was noted by him that assessee had engaged the services of Portfolio Managers to carry out the transactions of the sale-purchase of shares for which huge amount of PMS charges of Rs.52 lacs were paid. According to the AO, it was not an ordinary thing for a normal investor. Further, he referred to the decision of Delhi Bench of ITAT in the case of M1s Radials International vs. ACIT and issued show cause notice to the assessee asking him to explain as to why profits on sale of shares1 unit should not be treated as ‘business income’ of the assessee as against the ‘capital gains’ as claimed by the assessee in the return of income.
6. In reply, the assessee submitted that major activity of the assessee was income from sports endorsements which has been shown under the head income from business. In addition to that assessee had made Investment in shares from a long term point of view mainly to earn dividend and to maximize his wealth as a result of appreciation in value of shares. However keeping in view fluctuations in the stock market, the shares were sold time to time to minimize a risk of erosion in the value of shares and to book the amount of gain accrued to the assessee. It was also explained that assessee was not a trader1dealer in shares and therefore, the income returned under the head ‘income from capital gains’ in the identical facts in the earlier years has been accepted as such by the AO, all along. He distinguished the decision of the Tribunal relied upon by the AO in the case of M1s Radial International on facts and placed reliance in his support on two decisions of Mumbai Bench of the Tribunal in the case of Mrs. Radha Birju Patel (ITA No.53821Mum12009) and Mrs. Nalini Navin Bhagwati (ITA No.531Mum12010) for the proposition that merely because the assessee availed services of the Portfolio Manager for better administration and maximization of his wealth held in the form of shares, it would not mean that the assessee was engaged in the business of sale-purchase of shares. It was also submitted on without prejudice basis that profit arising on sale of shares through PMS was merely to the extent of Rs. 14,31,3301- and in case it was to be treated as income from business, the expenditure relating to profit earned on sale of shares i.e. Management Fee of Rs. 18,33,2581- was eligible for deduction, and only net amount of profit1loss could be assessed as part of taxable income. If it is so done, there would arise a loss of Rs.4,01,9281- from the transactions entered done through PMS, and thus nothing would be taxable on this account.
7. But, the AO rejected all the submissions of the assessee as well as judgments relied upon by the assessee by mentioning that facts involved in these cases were not identical to the case of the assessee. He also referred to the guidelines laid down by the CBDT in its Circular No.412007 dtd. 15.06.07 to determine whether the share transactions carried out by the Assessee fall under the head of ‘business’ or ‘capital gains’ and dismissed the assessee’s contention that the activity of sale-purchase of shares carried out by him was as an investor, but constitutes adventure in the nature of trade. It was also observed that the manner of activity in the stock market, viz, large volume of purchase and sale of shares, multiplicity of transactions, regularity of the transaction from year to year, engagement of portfolio manager for systematic transaction of shares and earning from the sale of shares systematically, reinvesting for acquisition of shares on regular basis to make profit etc go to show the existence of intent on the part of the assessee to trade in stock as a business activity. Accordingly, AO assessed the income at Rs.1,35,76,2441- earned by the assessee out of sale and purchase of shares under the head ‘profits and gains of business’. However, while assessing the income under the head ‘income from business’ the AO did not distinguish between the shares purchased and sold with the help of PMS or without it.
8. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and made detailed submissions along with various evidences to justify its claim that the assessee had rightly disclosed gain arising on sale and purchase of shares as assessable under the head income from capital gains. Ld. CIT(A) considered the submissions of the assessee and also analyzed various evidences in the light of observations made by the AO in the assessment order and also considered the judgments relied upon by both the sides. It was held by him that assessee had made investment in shares and the purchase and sale of shares was done as investor, therefore, resultant gain would be assessable under the head of capital gain as has always been accepted by the AO in all the preceding years. It was also held by him that the shares sold through PMS constituted only small portion of the total investment and in any case merely because assessee engaged Portfolio Manager, it would not mean that assessee carried out the activities would become of the nature of business. Being aggrieved, the Revenue filed an appeal before the Tribunal.
9. During the course of hearing before us, Ld. DR heavily relied upon the order of the AO. Per contra, Ld. Counsel of the assessee took us through various pages of the paper book in support of detailed findings given by the Ld. CIT(A) and also submitted that income from sale of shares has always been disclosed assessable under the head of capital gain, consistently by the assessee since last many years and accepted as such by the Revenue always. In some of the years, orders were passed u1s 143(3). It was in nutshell submitted by him that following facts and figures can be verified from the evidences brought on record by the assessee before the lower authorities as well as before the Tribunal:-
1. Income from business and other sources is more than 97.5% of capital gains (Page No. 51)
2. The investment are made out of own funds earned by the Appellant from his regular business activity and not from borrowings (Page No. 31).
3. The income from investments in shares / Mutual Funds has been assessed as Capital Gains in all the earlier years vide orders passed under section 143(3) and that there are no charge in the facts and circumstances of the case during the year under consideration.
4. The Appellant has disclosed the amounts invested under the category “Investment” and has not revalued the same in the books to adjust the reduction in market value, if any (Page No.36).
5. The investment in shares with PMS is 4.86% of the total investments (Page No. 54).
6. The dividend income is far in excess of the capital gains (Dividend income is 125 times the capital gains) (Page 52).
7. Investment in shares held under PMS is 7.6% of total investment under PMS (Page No. 55).
Income under the head capital gain is 2.34% of gross total income (Page No.51)
10. It was also submitted by him that the view which has finally emerged on the basis of judgments of various courts with regard to PMS issue is that merely because shares were purchased and sold with the help of Portfolio Managers, it would not become business income if otherwise an assessee is an investor and always held the shares as part of investment. The gain arising on purchase and sale of shares would be assessable under the head income from capital gains. The reliance was placed by him on the following Judgments:
1. Nalin Pravin Shah (15751Mum12012)Mumbai
2. Nalini Navin Bhagwat (531Mum120 10) Mumbai
3. Radha Birju Patel (53821Mum12009) Mumbai
4. ARA Trading (13 com20) Pune
5. Apoorva Patni (54 SOT 9) Pune
6. KRA Trading (46 SOT 19) Pune
7. Janak S Rangwala (11 SOT 627) Mumbai
11. We have gone through the orders passed by the lower authorities and submissions made and evidences brought before us by both the sides as well as judgments relied upon by the AO, Ld. CIT(A) as well as Ld. Counsel of the assessee before us. It has been noted by us at the very outset that the Assessing Officer’s main thrust was that income arising to the assessee from purchase on sale of shares would be assessable as business income because the assessee had availed the service of Portfolio Managers. Though, the assessee had pointed out to the AO on without prejudice basis that the gain arising on shares sold through Portfolio Manger was of a minor amount and substantial amount of gain was earned through shares sold without the help of Portfolio Manager, but despite that AO assessed the entire amount of gain as business income, comprising of gain earned on share sold with or without the service of Portfolio Managers. Thus, it is indicative of the fact that assessment order was passed by the AO without properly analyzing the fact and figures and disregarding the submissions of the assessee as well as past history of the assessee which has been accepted all along bythe predecessors of the AO in all of the past years. Ld. CIT(A) made proper analysis of facts before deciding this issue and recorded detailed findings before holding that the gain earned by the assessee on sale and purchase of shares was assessable under the head income from capital gains. The relevant part of findings of Ld. CIT(A) is reproduced hereunder:
“I have duly considered the above submissions of the appellant. In para 8 of the order, the AO has mentioned that the profit on sale of shares shown by the appellant is Rs.1,44,85,693/- (Rs.85,56,188 + 83,11,319 – 23,81,814) which he has treated as income from business.
7.1. During the course of appellate proceedings, detailed break up of above profits has been furnished. The same being as follows:
