Sri Kamall Kailash Chandra Sodhi V. Assistant Commissioner of Income Tax Circle (1)

ITA/387/2009

AI Insights

The case revolves around the classification of income derived from the sale and purchase of shares through a Portfolio Management Company by the appellant, Sri Kamall Kailash Chandra Sodhi, an employee of Microsoft Corporation. For the assessment year 2005-06, the appellant declared a substantial income under 'short-term capital gains' from these transactions. Initially, this income was accepted under section 143(1) of the Income Tax Act, but upon scrutiny, it was reclassified as business income by the Assessing Officer under section 143(3). The appellant contested this reclassification, and after a series of appeals, the Tribunal upheld the reclassification, leading to the present appeal in the High Court. The core legal issue was whether the income from such investments should be classified as business income or capital gains.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 794028 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 27-07-2015
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax Vs M/s Kapur Investments (P) Ltd., Radials International
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: A SHANKER; M LAVA
• Keywords: Business income; Short Term Capital Gains; Taxability; Portfolio Management Service
• Section: 143(3); 143(1); 260A; 111A; 111A

Judgement Text

" IN THE HIGH COURT OF KARNATAKA AT BENGALURU Dated this the 27th day of July, 2015 Present THE HON’BLE MR JUSTICE VINEET SARAN & THE HON’BLE MR JUSTICE A V CHANDRASHEKARA Income Tax Appeal 387 / 2009 Between Sri Kamall Kailash Chandra Sodhi # 6A, Conventry Apartments Convent Road Bangalore 25 Appellant (By Sri A Shanker & M Lava, Adv.) And Assistant Commissioner of Income Tax Circle (1), C R Building, Queens Road Bangalore 1 Respondent (By Sri K V Aravind, Adv.) Appeal is filed under S.260A of the Income Tax Act praying to set aside the order of the Tribunal in ITA 040/Bang/2008 for the assessment year 2005-06 on 27.2.2009 – annexure A. Appeal coming on for hearing this day, Vineet Saran J, delivered the following: 2 JUDGMENT The appellant is an individual employed in Microsoft Corporation. For the assessment year 2005-06, he filed his return of income in which a sum of Rs.42,55,444/- was disclosed as income under the head of ‘short term capital gains’. Such income was derived from sale and purchase of shares through a professionally managed company namely, UTI Securities Limited. Initially, the return filed by the petitioner was accepted under section 143(1) of the Income Tax Act (for short ‘Act’) but subsequently, it was selected for scrutiny and a fresh assessment order was passed by the Assessing Officer under section 143(3) of the Act on 29.8.2007 whereby the benefit of short term capital gains on income from sale and purchase of shares from UTI Securities Ltd was disallowed. The appeal filed by the appellant before the Commissioner of Income Tax (Appeals) was allowed on 30.4.2008. Challenging the said order of the appellate Commissioner, Revenue filed an appeal before the Tribunal which has been allowed vide order dated 27.2.2009. Aggrieved by the said order, assessee has filed this appeal raising the following substantial questions of law: 1 Whether the Tribunal was justified in law in holding the income offered under the head short term capital gains is to be assessed as business income on the facts and circumstances of the case; 3 2 Whether the provisions of section 111A relating to taxability of short term capital gains which is effective from 1.10.2004 are applicable to the facts of the appellants case. We have heard Sri A Shanker, learned counsel for the appellant as well as Sri K V Aravind, learned counsel for the respondent/Revenue at length and have perused the record. The sole question to be decided in this appeal is as to whether profits derived from investment made by a professional of his surplus money through a Portfolio Management Company would amount to business of such professional who is not directly involved in the sale and purchase of shares. It is accepted by the learned counsel for parties that a similar question came up for consideration before this Court in ITA 158/2014 (Commissioner of Income Tax Vs M/s Kapur Investments (P) Ltd.) in which, after an elaborate discussion, in paragraphs 10 and 11, it is held as under: 10 As regards the first question that merely because of employment of Portfolio Management Service for investment in shares, the same would become business income, we are of the opinion that the said issue has 4 been dealt with at length by the Delhi High Court in the case of Radials International (supra), wherein, in similar facts, the question has been answered in favour of the assessee and against the Revenue. Detailed reasons for the same have been given in the said judgment with which we concur. Even otherwise, it is admittedly not a case where the assessee had engaged its own persons or had a separate business infrastructure to carry out its share transactions for the purpose of business. It is merely a case where the assessee has invested funds through the Portfolio Management Service. 11 In our opinion, investment through Portfolio Management Service, which may deal with the shares of the assessee so as to derive maximum profits cannot be termed as business of the assessee but would only be a case of a more careful and prudent mode of investment, which has been done by the assessee. Funds which lie with the assessee can always be invested (for earning higher returns) in the shares either directly or though professional managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or though professional managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment, which is in shares, and the law permits it to be taxed as capital gains and not as business income. 5 Admittedly, in the present case, appellant had invested his surplus money in shares through a Portfolio Management Company and was otherwise engaged as a professional in a private company deriving regular salary. The investments managed by a Portfolio Management Company, on behalf of the assessee, would not become the business of the assessee and the profits derived therefrom would thus be liable to tax as short term capital gains and not as business income of the assessee, as has been already held in the case of Kapur Investments (P) Ltd. (supra). We see no reason to differ with the ratio laid down in the aforesaid judgment of a co- ordinate Bench. In view of the aforesaid, we answer the two substantial questions of law in favour of the assessee and against the Revenue. Appeal stands allowed. No order as to costs. Sd/- Judge Sd/- Judge An "