DCIT vs. M/S KAPOOR INVESTMENTS PVT. LTD.,,

Per Abraham P. George, Accountant Member

In this appeal, Revenue has taken the following grounds:-

3. The CIT (Appeals) erred in allowing the appeal without appreciating the high volume of transaction in shares, and that the assessee company itself has treated loss on derivatives and mutual funds as "Business loss" in the earlier years in respect of which reliance is placed by the CIT(A).

4. The CIT (A) erred in not appreciating the fact that the principles of res-judicate do not apply in income tax proceedings for him to lay on his own orders for the A.Y's to 2006-07 & 2008-09.

5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored.

6. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

However, AO was not impressed. According to him, there was substantial increase in share transactions and number of companies in which investments were made came to about 29. As per AO, the method of categorization of investments by assessee in its books of account was irrelevant. Further, as per AO, assessee had invested borrowed funds for investment in shares. He held the sum of Rs.29,83,788 as income under the head business and not as income from capital gains.

Assessee relied on its own case for the AYs 2006-07 & 2008-09. Ld. CIT(Appeals) found that for AYs 2006-07 & 2008-09, the issue was decided in favour of the assessee. He held that for the impugned assessment year also, business income arising out of sale of mutual funds and shares could not be treated as income from business, but only under the head ‘long term capital gains’.

“6. We have carefully considered the rival submissions, perused the relevant materials on case records and also the case laws on which the learned AR had placed strong reliance. As a matter of fact, the issue has since been deliberated exhaustively by the CIT (A) and came to the right conclusion that the assessee had invested in shares with an intention of holding them as investments and the surplus on account of sale of these shares have to be treated as short-term or long term capital gains depending on the period of holding. The above finding of the CIT (A) is in conformity with the guidelines issued by the Board vide its Circular No.4 of 2007 dated 15.6.2007. Likewise, for the AY 2008-09, the CIT (A) took a stand that the income from capital gains, short-term or long-term capital based on the period of holding of such assets cannot be treated as ‘business income’. The Revenue has not brought any documentary evidence or proof to contradict the conclusion arrived at by the CIT(A). Photocopy of the agreements entered by the assessee company with the Portfolio Manager (M/s. Kotak Securities Ltd) has been placed on record. On perusal of the same, it is evident that the Portfolio Manager is trading in shares/scripts/mutual funds and the assessee company does have any say. In the instant case assessee company had invested its funds with the Portfolio Management Scheme for maximization of wealth. The assessee company cannot be said to be systematically dealing in share to term the activities of the assessee as in nature of ‘business’.

6.1 The learned AR has placed reliance on number of judicial views in support of the assessee’s contentions. To illustrate further, the views of judiciaries are analyzed as under: (i) In the case of ITO v. Radha Birju Patel reported in A(2011) 11 Taxmann.com 293(Mum), the Hon’ble Mumbai Tribunal has held, on a similar issue, as under: “It was apparent from the record that the share transactions in question were carried out by the assessee’s PMS Manager. Therefore, these transactions were clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investment made by an assessee is protected and enhanced and in such a circumstance, it cannot be said that it is scheme of trading in shares and stock. Whether, an assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. In circumstance, in which the assessee was engaged in a systematic activities of holding portfolio through the PMS Manager, it could not by any stretch of imagination, be said that the main object of holding the portfolio was to make profit by sale of shares during the course of maintaining the portfolio investment over the period. Therefore, the Commissioner (Appeals) was justified in accepting the gain on sale of shares as short-term capital gain as claimed by the assessee.” (ii) Yet another finding, the Hon’ble ‘H’ Bench of Mumbai Tribunal in the case of Mahendra C Shah v. Addl. CIT reported in (2012) 19 taxmann.com 350 (Mum) has held that ‘prima facie there was enough evidence to show that the assessee was an investor in shares and, therefore, the surplus arising on the sale of shares should be assessed as short-term or long-term capital gains, depending on the period of holding and not as business income.’

` (iii) The Hon’ble Gujarat High Court in the CIT v. Niraj Amidhar Surti reported in (2012) 20 taxmann.com 579 (Guj) has ruled as under: “that in the light of the findings recorded by Commissioner (Appeals) that the assessee had held the shares in question for fourteen months which is a long period for the purpose of long-term capital gain, the intention of the assessee had always been that of making investment in shares and not dealing in shares, which was also apparent from the fact that the shares had not been treated as stock in trade by the assessee; even after the sale, the assessee had made investment in bonds of NABARD, indicating that he had treated the same as long-term capital gain; as well as the fact that the assessee had not split the shares in lots but had sold the same in one lot; it was not possible to agree with the contention raised on behalf of the revenue that the transaction in question was an ‘adventure in the nature of trade’ and, therefore, income derived by the assessee from the said transaction was a business income and could not be treated as capital gains.” 6.2. Taking into account all the facts and circumstances of the issue as discussed above and also in conformity with the ratios laid down by the Hon’ble High Court of Gujarat and also the Hon’ble Mumbai Tribunal (supra), we are of the view that the CIT (A) was justified in coming to right conclusion which does not warrant any interference. In essence, the findings of the CIT (A) for both the assessment years under dispute are upheld.”

“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.

Pronounced in the open court on this 29th day of April, 2016.