Profit on sale of shares through PMS to be taxed as capital gains & not business income – Karnataka HC


CIT v KAPUR INVESTMENTS (P) LTD [ITA NO.158/2014 & ITA NO.159/2014 dated 20.04.2015] KARNATAKA HIGH COURT

Background:

Assessee Company is engaged in the business of finance and films. The assessee had invested money in shares through the Portfolio Management Scheme of M/s.Kotak Securities Limited. Since there were regular transactions of sale and purchase of shares, the Assessing Officer, for the relevant assessment years, held the same to be ‘business income’.

Commissioner of Income-tax (Appeals) granted relief to the assessee and held the profit to be taxed as capital gains. Against the orders of theCIT(A), the tax authorities filed appeals before the ITAT. In the first round, the Tribunal remanded the matter to the CIT(A), which again held in favour of the assessee. Thereafter, the Tribunal dismissed the appeals of the Tax Authorities. 

HELD:

  • This issue has been dealt with at length by the Delhi High Court in the case of Radials International  (2014) (367) ITR 1, wherein, in similar facts, the question has been answered in favour of the assessee and against the Revenue.
  • 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.
  • 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.
  • As regards the second question of the assessee having taken loan and having invested borrowed funds in purchase of shares, the Income Tax Act does not prohibit the assessee from making investments in capital assets after using borrowed funds.
  • The findings arrived at by the Tribunal are in conformity with the guidelines issued by the Circular of the CBDT dated 15.06.2007.

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