The Mumbai bench of Income Tax Appellate Tribunal (ITAT) yesterday dismissed the Department’s appeal against the former Cricketer Sachin Tendulkar and held that income from sale-purchase of shares cannot be treated as ‘Business “Income’ merely because the assessee has availed the service of Portfolio Manager.
Coming to the facts of the case, the AO observed that the assessee is engaged in the services of Portfolio Managers to carry out the transactions of the sale-purchase of shares for which huge amount of PMS charges of Rs.52 lacs were paid which is according to him, is not an ordinary thing for a normal investor.Accordingly, the income from the above activity was treated as “business income” of the assessee.
Denying the observations of the AO, the assessee submitted that majority of his income was income from sports endorsements which I shown under the head income from business.Additionally, he made investment in shares from a long term point of view mainly to earn dividend and to maximize his wealth as a result of appreciation in value of shares.It was therefore, submitted that sale and purchase of of shares cannot be treated as the business of the assessee merely because the assessee availed services of the Portfolio Manager for better administration and maximization of his wealth held in the form of shares.
The first appellate authority accepted the contentions of the assessee and held that assessee had made investment in shares and the purchase and sale of shares was done as investor and therefore, it is taxable under the head “Capital gains.” It was further held that the shares sold through PMS constituted only small portion of the total investment and in any case merely because assessee engaged Portfolio Manager, it would not mean that assessee carried out the activities would become of the nature of business. The revenue challenged the order before the Appellate Tribunal.
The bench noted that the entire investment has been made by the assessee out of its own funds and no amount of shares has been invested from any borrowing. The assessee has disclosed the amounts invested in the shares in the category of ‘investments’ right from beginning. The shares have never been revalued to bring them in line with the market value as would have otherwise been done in the case of stock-in-trade. The stock in trade is always disclosed at cost or market price which is lower. No such exercise has been done by the assessee in the case of sharessince these have been held under the head of ‘investments’.
The bench further relied upon the CBDT circular dated 15-06-2007 wherein it was clarified that an assessee can have two portfolios, i.e. one for investment purposes and the other for business purposes. The amount held in the investment portfolio would be assessable as income under the head ‘Capital gains’.
“As per law initial choice was with the assessee that whether initial amount invested in the shares was to be treated as part of ‘investments’ or ‘stock-in-trade’. The assessee exercised its choice and kept the same as part of ‘investments’. It is well settled law that a tax payer can very well plan it’s affairs in such a manner so as to minimize the burden of tax so long as no mala fide or bogus practices are followed and tax planning is done by the assessee strictly within the framework of law.”, the bench oberved.
“The income arising on account of sale -purchase of shares if assessed under the head of capital would of course be taxable at relatively lower rate of tax and is also exempt in some cases, as compared to the business income which is taxable at relatively higher rate of tax. But, if such income is assessable under the head income from business then the assessee would be entitled for claim of set of expenses incurred in the normal course of business to earn such income and the tax would be payable only on the amount of net profit. Therefore, while drafting the provisions the legislature did not make any water tight rule for determination of nature of income arising from purchase and sale of shares to be assessed under the head of capital gains or business income. It has been left upon the wisdom of the assessee and facts and circumstances of the case.”, the bench also added.
Diving deeply into the facts of the case, the bench noted that the assessee had adopted a particular course by which he explicitly categorised the amount invested in shares as part of ‘investments’ and not as part of ‘stock-in-trade’. Therefore, the AO’s allegation that assessee did not make ‘investment’ into shares but carried it out as business activity merely relying upon factors like volume or frequency of transactions alone, was found as not in accordance with law and facts of this case.
Referring to the precedents, the bench noted that the impugned income cannot be assessable under the head income from business merely because the assessee has availed the service of Portfolio Manager.
Read the full text of the order below.
