Profits and Gains of Business or Profession
Profits and Gains of Business or Profession
Profits and Gains of Business or Profession
The case that we have selected to do our project on is Radials International vs. CIT(A), the
main issue in the said case was to determine whether investment by the Portfolio
Management system is under the head of capital gains or if it comes under the head of
income under Business. We have given a brief of the case in the project.
Income under capital gains:
The meaning of capital gains is any income arising from tranfer or sale of capital asset.
Capital assets mean property of any kind held by the assessee except:
(a) Stock in trade,
(b) Personal effects, being moveable property (excluding Jewellery, archaeological
collections, drawings, paintings, sculptures or any other work of art) held for personal
use.
(c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality,
municipal corporation, notified area committee, town committee or a cantonment board with
population of at least 10,000.
(d) Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer
Bonds.
e) Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt.
from such a firm. Any sum whether received or receivable in cash or kind, under an
agreement for not carrying out any activity in relation to any business or not to share any
know-how, patent, copyright, franchise, or any other business or commercial right of
similar nature or technique likely to assist in the manufacture or processing of good.
Commissioner of Income Tax (Appeals) held that the intention at the time of purchase
and sale, the magnitude and frequency of transactions has to be seen to test whether
the sum of gain made was a mere enhancement of value by realizing a security or a
gain made in operation of business in carrying out a scheme for profit-making. It
was concluded that the shares were not in the nature of property which yielded any
income or personal enjoyment to the owner, by virtue solely of its ownership. Thus,
the intention was concluded to be profit-making, and the gains were found to be
business income.
The ITAT upheld the order of the CIT(A), and found the gains to be business
income. It held that the nature of a PMS agreement is that it prevents holding of
dormant of stocks of depreciating value, and that the PMS is supposed to provide
the skill and expertise to steer through the complex volatile and dynamic conditions of
the market. Since the ITAT found that the gains were taxable as business income, the
exemption of section 10(38) for long term capital gains for shares held longer than 12
months, as well as the claim for concession at the rate of 10% under section 111A on
short term capital gains were both denied
CIT(A) Ruling:
The CIT(A) ruled that to determine the nature of transactions the intention at the time
of purchase and sale and the frequency of the transactions must be taken into
consideration. He also stated that since there was not any personal enjoyment or
income yielded from the shares that the investment was done for profit making.
As the taxpayer was aggrieved by such decision it had appealed to the Income-tax
Appellate Tribunal.
Tribunals ruling:
The income tax tribunal upheld the CIT(A)s order and said 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;
As states in our project, we believe that the PMS agreement was merely an agreement of
agency and it can not be used to infer any intention to make profit. The intentions of an
assesse must be inferred holistically, from the conduct of the assesse, the circumstances of the
transaction and not just be inferred from the seeming motive at the time of depositing money.
Therefore along with the intention of the assessee other crucial factors like the substantial
nature of the transactions, frequency, volume etc and thus must be taken into account to
evaluate whether the transactions are adventure in the nature of trade.