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Profit on sale of mutual fund units held as investment are taxable under the head ‘capital gains’ and not ‘business income’
Profit on sale of mutual fund units held as investment are taxable under the head ‘capital gains’ and not ‘business income’
Profit on sale of mutual fund units held as investment are taxable under the head ‘capital gains’ and not ‘business income’
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Profit on sale of mutual fund units held as investment are taxable under the head ‘capital gains’ and not ‘business income’

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Recently, the Delhi High Court in the case of Yama Finance Ltd. held that surplus derived from sale of mutual fund units held as investments should be treated as long-term capital gains and not as …

Recently, the Delhi High Court in the case of Yama Finance Ltd. held that surplus derived from sale of mutual fund units held as investments should be treated as long-term capital gains and not as business income under the Income-tax Act, 1961.

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  • 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 20 May 2014 Profit on sale of mutual fund units held as investment are taxable under the head ‘capital gains’ and not ‘business income’ 19 May 2014 B Background Recently, the Delhi High Court in the case of Yama Finance Ltd.1 (the taxpayer) held that surplus derived from sale of mutual fund units held as investments should be treated as long-term capital gains and not as business income under the Income-tax Act, 1961 (the Act). Facts of the case  The taxpayer is engaged in the business of investing in shares and mutual fund units.  During the year under consideration, the taxpayer derived income by way of interest, dividend and profit on sale of shares and mutual fund units.  The investment in mutual funds units was recognised as ‘investments’ in the balance sheet and not as stock-in-trade. _______________ 1 Yama Finance Ltd v. ACIT [ITA Nos. 1658/2010 (AY 2006-07)] – Taxsutra.com  While the taxpayer offered to tax the surplus on sale of shares as business income, surplus on sale of mutual fund units was offered to tax as capital gains.  The Assessing Officer (AO) held that the surplus on sale of mutual fund units was to be taxed as business income.  Aggrieved by the order of the AO, the taxpayer appealed before the Commissioner of Income- tax (Appeals) [CIT(A)]. CIT(A)’s order  The CIT(A) passed the order in favour of the taxpayer based on the following:  The taxpayer had employed his own funds out of share capital and accumulated free reserves and there was no borrowing;  It lacked proper infrastructure;
  • 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.  It employed only one employee;  It consistently treated mutual fund units as investments even when no special privileges/tax concessions were available and subsequent benefits/tax concessions cannot now regard the whole transaction as business;  The auditor’s report and schedule VI of the balance sheet has identified mutual fund units as ‘investments’, categorically stating that the company is not holding any stock in trade;  Mutual fund units are not freely transferable/ tradable, and hence cannot be categorised as business. The units can only be bought and redeemed with the mutual fund;  The key decision making authority rests with the fund manager of the respective mutual fund and the taxpayer does not have any say as to when to buy, what to buy, when to sell and what to sell;  Sale of mutual fund units resulting in capital gains has been held in favour of the taxpayer in an earlier year by the CIT(A);  Most of the investments in the mutual fund units have been held for a considerable time, and thus frequency is restricted;  Investment in mutual fund units has been recognised as approved investment under section 11(5)2 of the Act.  Aggrieved by the CIT(A) order, the department filed an before the Tribunal. Tribunal’s ruling  The Tribunal reversed the CIT(A) order on the basis of the following observations:  Characterisation of income between capital gains and business income has to be determined on the basis of intention of the taxpayer at the time of investment, and classification as an investment in the balance sheet (and not stock-in-trade) is not the sole criteria;  Argument regarding lack of infrastructure cannot be relied upon given that professional services were availed for taking buying and selling decisions; ______________ 2 Section 11(5) of the Act specifies a list of approved investments for claiming tax exemption by charitable and religious trusts in case such trusts do not apply 85 percent of the income towards charitable and religious purposes.  75 per cent of units were disposed off in the year under consideration. This fact turns against the taxpayer in the absence of any reasons furnished for such wholesome sale of units. High Court’s ruling  The High Court affirmed the CIT(A)’s finding that under Section 11(5), the Act recognises the investment in mutual fund units as a separate category of ‘investments’ as far as trusts are concerned. Given this, investments in mutual fund units are of an entirely different kind and cannot be clubbed with sale of shares or commodities.  It also affirmed the conclusions expressed in CIT(A)’s order regarding application of clearly recognised tests to determine the nature of income.  Having regard to the above and further to the fact that the taxpayer had kept the mutual fund units separately in an investment account and that most of the units were held for a considerable time around two years, the Court held that surplus on sale of mutual fund units was taxable as capital gains and not as business income. Our comments The classification of income from sale of securities as business income or capital gains has always been a matter of litigation. This ruling would be a relief in case of income from sale of mutual fund units classified as investments in the books of account. However, as the subject matter has constantly been a matter of litigation, the facts of each case needs to be examined before arriving at a conclusion. It is interesting to note that the Delhi High Court has emphasised on the point that mutual fund investments are considered as approved investments for the purpose of Section 11(5), and accordingly is a separate category of investment under the Act. It may be mentioned that in few other decisions3 also, the income from sale of mutual fund units has been considered as capital gains on the basis of facts of those cases. _________ 3 ACIT v. Sri ASL Finvest Ltd. [2014] 41 taxmann.com 460 (Hyd) and Trinetram Consultants (P.) Ltd. v. DCIT [2013] 34 taxmann.com 39 (Mum)
  • 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 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 Bangalore 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

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