TMI Blog2016 (11) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld.CIT(A) with regard to interest earned in NRE account is directed to be deleted. Sale of shares in mutual fund under Portfolio Management Scheme (PMS) - capital gain or busniss income - Held that:- Hon’ble Karnataka High Court in the case of CIT vs Kapur Investments (P) Ltd (2015 (5) TMI 616 - KARNATAKA HIGH COURT ) 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his wealth; 7. erred in not appreciating that it is the PMS which is engaged in the business activity and not the Appellant, ie PMS (and not the Appellant) decides the frequency of transactions, extent of investment, period of holding and size of transactions; Initiation of penalty proceedings under section 271(1)(c) of the Act 8. erred in initiating penalty proceedings under section 271(1)(c) of the Act. 2. Ground 1 is general and, therefore, dismissed. 3. 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. 4. 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. 5. During the course of first appellate proceedings, Ld. CIT(A) raised a new issue whereby interest income earned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Account... It is thus noted that the essential condition required is that the assessee should be a person resident outside India in the relevant year in view of relevant provisions of FEMA, 1999. In this regard, it is noted by us that though AO did not make any addition but Ld. CIT(A) raised this issue and made the addition by way of enhancement. In this regard it is noted by us that similar issue has been decided by the Ld. CIT(A) in assessee s own case for A.Y. 2009-10 vide his order dt 20-02-2013 wherein he has analyzed complete facts of the assessee and relevant law contained in FEMA and thereafter following factual findings were recorded by him: 7. I have carefully considered the facts of the case. It appears that during the relevant period, the assessee was on deputation to India to a subsidiary of Sun Life Assurance Company of Canada and therefore, he was not in India for45 employment purposes but was to return back to Canada after completion of his deputation period. Therefore, he was a person not resident in India as per section 2(w) of (Foreign Exchange Management Act). If that be the case, the assessee is entitled for exemption u/s 10(4)(ii) of the I.T. Act. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 ITA No.5382/M/2009 order dt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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. 15. 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: 10. As regards the f irst quest ion that merely because of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments 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. 17. 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), acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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