VENKATESH SATYARAJ MYSORE,MUMBAI vs. D.C.I.T. 26(1), MUMBAI

This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals) [hereinafter called CIT(A)] dt 31-01-2012 passed against the assessment order of the AO u/s 144 dt 30-12-2010 for A.Y. 2008-09 on the following grounds:

Ground 1 is general and, therefore, dismissed.

Grounds 2 & 3 deal with the action of lower authorities in bringing to tax the amount of interest income earned by the assessee upon its Non Resident External Rupee Accounts (‘NRE Accounts’) by denying the exemption claimed by the assessee u/s 10(4)(ii) of the Act.

The brief facts are that during the year, the assessee was an employee of Metropolitan Insurance Corporation, USA and filed his return of income in India disclosing income from salary, house property and capital gains. The AO made ex-parte assessment u/s 144 against which assessee had filed appeal before Ld. CIT(A) on various issues.

During the course of first appellate proceedings, Ld. CIT(A) raised a new issue whereby interest income earned on NRE Account with ICICI bank, HDFC and CITI Bank aggregating to Rs.28,828 was brought to tax.

During the course of hearing before us, it was submitted by the Ld. Counsel that interest income on NRE account is exempt u/s 10(4)(ii) in case of the person, who during the concerned year was resident outside India, as defined in section 2(q) of the Foreign Exchange Management Act, 1999 (hereinafter called as FEMA) or if the assessee has been permitted to maintain aforesaid NRE account by the Reserve Bank of India (referred to as RBI hereinafter). It was submitted that the assessee was resident outside India under the relevant provisions of FEMA. It was further submitted that the Assessing Officer was satisfied with the conditions of this section and that is why no addition was made by the Assessing Officer. Our attention was also invited to the order passed by Ld. CIT(A) in the case of assessee for A.Y. 2009-10 wherein factual finding was given by Ld. CIT(A) that assessee was a person resident outside India and this order was accepted by the revenue and no appeal was filed before the Tribunal against this order.

Per contra, the ld. DR could not controvert the factual submissions of the assessee and could not controvert that the order of Ld. CIT(A) of A.Y. 2009-10 was accepted by revenue and no appeal was filed against the said order before the Tribunal.

We have considered the submissions made by both the sides and gone through the orders passed by lower authorities. It is noted that section 10(4)(ii) provides that interest income earned on NRE account shall be exempt under certain situations. The relevant part of provisions is reproduced below: “10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included – (1) to (3) xxxxxxxxxxxxxxxxxxxxxx (4) (i) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Perusal of the aforesaid findings of Ld. CIT(A) given in A.Y. 2009-10 reveals that assessee was on deputation to India with a subsidiary of M/s Sunlife Assurance Co of Canada. It has been further held that assessee was a person not resident in India as per provisions of FEMA. It has been further held by Ld. CIT(A) that the assessee satisfied both the conditions of section 10(4)(ii) of the Act. It is further noted by us that in the year before us the assessment was done ex-parte and addition was made by the Ld. CIT(A) by way of enhancement. It is further noted that facts have not been properly analysed by Ld. CIT(A) in the impugned year. On the other hand, in the assessment year 2009-10 proper factual analysis were made by Ld.CIT(A) and his order has been accepted by the revenue as per the facts narrated before us by the ld. Counsel. Under these circumstances, we find that the interest income of the assessee is exempt u/s 10(4)(ii) of the Act and, therefore, addition made by the Ld.CIT(A) with regard to interest earned in NRE account is directed to be deleted. These grounds are allowed.

Grounds 4 to 7 deal with action of the Ld. CIT(A) in treating the capital gain on sale of shares in mutual fund under Portfolio Management Scheme (PMS, in short) as an adventure in the nature of trade and thereby holding it to be business income as against claim of the assessee as capital gains. 11. During the course of hearing, it was stated by the ld. Counsel that this is the first year when this income has been received. The assessee is a US citizen and is a salaried employee. The assessee did not have any experience and skill in the share-market, and therefore, he took help of specialists and made investments in shares through PMS for maximising his wealth and value of investments. It was further submitted that the AO did not raise this issue whereas only Ld. CIT(A) raised this issue and made the addition by way of enhancement of income. It was further submitted that Ld. CIT(A) treated this amount as business income only on the basis of number and volume of transactions. None of the cases relied upon by Ld. CIT(A) pertains to investment through PMS. It was further submitted that in subsequent years also the AO has not raised this issue and accepted the claim of the assessee by treating the amount of capital under PMS as assessable under the head “Income from capital gains”. The ld. Counsel relied upon the following decisions:- CIT vs Kapoor Investments Pvt Ltd 234 Taxmann 149 (Kar) ITO vs Radha Birju Patel order dt 30-11-2010 ARA Trading & Investments (P) Ltd vsa Dy.CIT 47 SOT 172(Pune) Manan Nalin Shah ITA 5635/Mum/2009 & Ors dt 23-01-2013 12. It is thus submitted that the impugned amount is assessable under the head “Income from capital gains” and, therefore, order of the Ld. CIT(A) should be reversed.

Per contra, Ld. CIT-DR submitted that the frequency of trading in the activities of sale / purchase of shares is actually an adventure in the nature of trade. He submitted that Ld. CIT(A) has rightly considered the facts of the case wherein number of transactions were done by the assessee, and therefore, the resultant income has rightly been taxed under the head “Income from business”.

We have gone through the orders passed by lower authorities and submissions made before us by both the sides. The admitted facts are that the assessee is a salaried employee of Sunlife Assurance Company of Canada. It is further admitted that assessee has set his foot in the share market. Under these circumstances, assessee entered into an agreement with M/s Unify Wealth Managment Pvt Ltd for investment in stock market through PMS offered by the Portfolio Manager. Our attention was drawn to various clauses of the agreement to emphasise upon the fact that the whole investment objective of the assessee was to maximise the value of investments of the assessee. It was further shown to us that the Portfolio Manager was appointed for “investment management”. It is further noted that the assessee had made the investment using his own funds and admittedly no borrowed funds were used by the assessee for making aforesaid investment. The only ground taken by the Ld. CIT(A) to treat this as an adventure in the nature of trade was that the assessee had more than 400 transactions and, therefore, assessee’s dealings amounted to adventure in the nature of trade and resultant income was assessable under the head “Income from business”. In reply to the same, the Ld. Counsel had produced before us, various details and documentary evidence to show that due to the use of electronic system of stock exchange the transaction was divided for similar quantities and, therefore, numbers of transactions appearing in the list were larger than the transaction actually entered into by the assessee. The instances were shown with respect to respective shares of Deccan Aviation Ltd & Rayban Sun Optics India Ltd. It was further submitted that in any case, number of transactions cannot be the sole criterion for holding that the transaction was part of business transaction. In this regard reference has been made by Ld. Counsel to various judgments wherein it has been held that a transaction cannot be held to be business transaction on the basis of its volume only.

It has been further shown to us that average period of holding of shares is about 3 months and therefore, it cannot be said that assessee was engaged in any speculative transactions, at all. It is further shown to us that Hon’ble Karnataka High Court in the case of CIT vs Kapur Investments (P) Ltd (supra) has decided this issue in favour of the assessee by holding that the profits earned from investment through PMS – whether directly or indirectly or though PMS, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment i.e. in shares, and law permits it to be taxed as capital gains and not as business income. Relevant portion o the said judgment is reproduced hereunder for the sake of ready reference:

It is further noted by us that in the case of Radials International vs ACIT 367 ITR 1 (Del), Hon’ble Delhi High Court held that PMS agreement is merely an agreement for agency and could not be used to infer any intention to make profits; an intention of the assessee should be inferred holistically from conduct of the assessee and circumstances of the transactions. Similarly in the case of Radha Birji Patel (supra), the co- ordinate bench had taken a similar view wherein it was held that the transactions carried out under PMS are in the nature of transactions meant for maximisation of wealth rather than negotiating the profits on appreciation in value of shares. It was further held that real nature of PMS is such that the investments made by the assessee are protected and enhanced and in such circumstances, it cannot be said that PMS is a scheme of trading in shares and stock. Similarly in the case of ARA Trading & Investments (P) Ltd vs DCIT (supra), the ITAT held that investment made through PMS is an activity of wealth maximisation rather than profit maximisation and, therefore, resultant income should be charged under the head “Income from capital gains”. Further, Hon’ble Mumbai Bench “F” of the Tribunal in the case of Manan Nalin Shah (supra), wherein one of us i.e. Hon’ble JM was a party, also took a similar view.

It has been further noted by us that a vital fact to be noted here is that this dispute has been raised in this year only and that too, by Ld. CIT(A) alone. The AO had accepted and assessed this income under the head “Income from capital gains”. Further important fact to be noted here is that in all the subsequent years, the claim of the assessee has been accepted. In A.Y. 2009-10, 2010-11 and 2012-13 the assessments were framed u/a 143(3) wherein income from PMS has been assessed under the head “Income from capital gains”. In A.Y. 2011-12, the assessment was done u/s 143(3), accepting the claim of the assessee. These facts were narrated by the Ld. Counsel and were not controverted by the ld. DR and, therefore, they are taken as correct by us.

Thus, taking into account the facts of this case and legal position as is brought before us and also the fact that the claim of the assessee has been accepted by the AO as well as the Ld. CIT(A) consistently in all subsequent years, we hold that the action of Ld.CIT(A) in treating the income from PMS as business income is contrary to law and facts. The AO is directed to treat the said income as income assessable under the head “Income from capital gains”. The addition proposed by the Ld. CIT(A) in this regard is directed to be deleted. Grounds 4 to 7 are allowed.

Ground 8 is with regard to initiation of penalty. The ground is dismissed as premature.

Now we shall take up assessee’s appeal in for A.Y. 2010-11. The solitary ground raised