© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
Upcoming SlideShare
Loading in …5
×

Income from shares purchased and sold through a discretionary portfolio management scheme is taxable as capital gains and not business income

152 views
142 views

Published on

Recently, the Delhi High Court in the case of Radials International held that income from sale of shares invested through a discretionary Portfolio Management Scheme is taxable as capital gains and not as business income under the Income-tax Act, 1961.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
152
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Income from shares purchased and sold through a discretionary portfolio management scheme is taxable as capital gains and not business income

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Income from shares purchased and sold through a discretionary portfolio management scheme is taxable as capital gains and not business income 21 May 2014 B Background Recently, the Delhi High Court (High Court) in the case of Radials International 1 (the taxpayer) held that income from sale of shares invested through a discretionary Portfolio Management Scheme (PMS) is taxable as capital gains and not as business income under the Income-tax Act, 1961 (the Act). Facts of the case  The taxpayer is a partnership firm, engaged in the business of providing technical, marketing and maintenance services for earth mover, aircraft and truck tyres.  During the year under consideration, the taxpayer derived income from sale of shares under PMS which were offered to tax as capital gains.  The Assessing Officer (AO) proposed to tax such gains as business income. _______________ 1 Radials International v. ACIT [ITA No. 485/2012 dated 25 April 2014]  To this, the taxpayer responded that:  the shares were depicted as investments and not as stock-in-trade in the Books of Account;  as the taxpayer had employed its own surplus funds, the intention was not to earn trading profit;  the holding period of the investments was substantial;  relationship between the investor and the investment manager was that of principal and agent;  the PMS transaction was delivery based.  However, the AO passed the assessment order considering the income from sale of shares through PMS as business income.  Aggrieved by the order of the AO, the taxpayer appealed before the Commissioner of Income- tax Appeals [CIT(A)].
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. CIT(A)’s order  The CIT(A), affirming the AO’s view, held that the intention at the time of purchase and sale and the magnitude and frequency of transactions has to be considered to determine the nature of gains.  Further, he stated that since the shares were not in the nature of property which yielded any income or any personal enjoyment, the intention was profit- making.  Aggrieved by the CIT(A), the taxpayer appealed before the Income-tax Appellate Tribunal (the Tribunal). Tribunal’s ruling  The Tribunal upheld the CIT(A)’s order on the basis of the following:  At the time of deposit of the amount with PMS, the intention of the taxpayer was to maximise the profits;  the nature of a PMS agreement is to prevent holding dormant stocks of depreciating value;  the PMS is supposed to provide the skill and expertise to steer through the complex, volatile and dynamic conditions of the market;  while depositing money under the PMS contract, the taxpayer has no control either on selecting the securities or the period of holding;  while the taxpayer records the deposit as an investment in his books, the taxpayer is not aware of the securities in which the money has been invested until the receipt of the quarterly statements from the portfolio manager;  merely because the purchase and sale is delivery based and balance in the DEMAT account is recorded as investment, the fact that trading is done by the portfolio manager would not change;  frequency of sale and purchase of shares indicated trading activity;  Principle of res-judicata is not applicable in case of income tax proceedings, and therefore the AO was not barred to take a view different from his earlier view.  Since the Tribunal taxed the gains as business income, exemption under Section 10(38) of the Act for long-term capital gains and concessional rate of 10 per cent under Section 111A of the Act for short term capital gains were denied to the taxpayer. High Court’s ruling  The High Court stated that while the portfolio manager had the discretion to invest on behalf of the taxpayer, he did not provide any guarantee about the appreciation of the securities invested in or that he would be responsible for any loss from the deficiency.  From the terms of the PMS agreement, it does not emerge that the intention was to make profits.  If no inference of an intention to invest can be made from the agreement, it does not translate that the intention was to trade for profits.  While a transaction may be motivated by the intention to resell at an enhanced value, it would not be possible to evaluate the nature of such transaction until securities are actually resold.  In a discretionary PMS, intention of the taxpayer ought to be evaluated post the fact of investment and not at the time of depositing the money with PMS.  The nomenclature of a document or deed is not conclusive of what it seeks to achieve, a Court has to consider all parts of it and arrive at a finding in regard to its true effect.  The High Court also referred to the CBDT Circular No. 4 of 2007 determining the tests to apply to determine the nature of such transactions.  The High Court hence concluded that the income from sale of shares through PMS was taxable as capital gains based on the following:  The PMS agreement was merely an agency agreement and cannot be used to infer intention of the taxpayer;  The intention of the taxpayer can be inferred from his conduct, the circumstances of the transaction and not just the seeming motive at the time of deposit;  Factors like substantial nature of the transactions, frequency, volume, etc. must be taken into account to evaluate if the transactions are adventure in the nature of trade;  71 per cent of the shares (which resulted in 81 per cent of total gains) were held for a period of more than six months. This shows that a large volume of shares purchased were intended towards investment;
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The fact that an average of four to five transactions were made daily and only eight transactions resulted in a holding period of more than one year was not supported as it was held that the number of transactions per day determined by an average cannot accurately reflect the holding period/ frequency of transactions. Further, it was also held that even if a small number of transactions resulted in holding period of more than a year, the number becomes irrelevant if a significant volume of shares was purchased and sold in those transactions. Our comments The classification of income from sale of securities as business income or capital gains has always been a matter of litigation. This High Court ruling would be a major relief for income from discretionary PMS. However, as the subject matter has been constantly under scrutiny, the facts of each case need to be examined before arriving at a conclusion. It may be mentioned that the income from sale of shares through discretionary PMS has been considered as capital gains in few other judicial precedents 2 too, based on the facts of each case. _______ 2 Salil Shah Family (P.) Trust v. ACIT [2013] 36 taxmann.com 543 (Mum), Apoorva Patni v. ACIT [2012] 24 taxmann.com 223 (Pune)
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

×