The order of the Bench was delivered by
ASHWANI TANEJA, AM:-This appeal has been filed by the assessee against the order of Commissioner of Income-tax (Appeals) [hereinafter called CIT(A)] dt 31-01-2012 passed against the assessment order of the AO u/s 144 dt 30-12-2010 for A.Y. 2008-09 on the following grounds:
Based on the facts and circumstances of the case and in law, the Appellant respectfully submits that the Learned Commissioner of Income-tax Appeals 'CIT (A)'] has:
General Ground
1. erred in determining the total income of the Appellant at Rs. 3,92,13,559 and thereby determining the tax liability of the Appellant at Rs. 1,32,36,916; Interest earned on Non-Resident External Rupee Accounts ('NRE Accounts')
2. erred in holding that the Appellant does not qualify as 'a person resident outside India' as per section 2(w) of the Foreign Exchange Management Act, 1999 (ie erstwhile section 2(q) of the Foreign Exchange Regulation Act, 1973) without appreciating the facts of the case;
3. erred in denying the exemption claimed by the Appellant under section 10(4)(ii) of the Income-tax Act, 1961 ('Act') and adding the interest earned on the NRE Accounts to the total income of the Appellant; Capital Gains on sale of shares and mutual funds under Portfolio Management Scheme ('PMS')
4. erred in treating the investment in shares and mutual funds made by the Appellant through a PMS as an 'adventure in the nature of trade', thereby holding it to be business income;
5. erred in not appreciating the fact that the Appellant was in full time employment first with Sun Life Assurance Company of Canada and later on with Metropolian Life Insurance Company of USA during the financial year 2007-08, and therefore the Appellant can never be said to be engaged in the business of dealing in shares;
6. erred in not taking into consideration that the Appellant like any other salaried individual, had invested his surplus from salary in shares and securities through a Portfolio Management Company ('PMS') only with an intention to maximize 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 on NRE Account with ICICI bank, HDFC and CITI Bank aggregating to Rs. 28,828 was brought to tax.
6. During the course of hearing before us, it was submitted by the Ld. Counsel that interest income on NRE account is exempt u/s 10(4)(ii) in case of the person, who during the concerned year was resident outside India, as defined in section 2(q) of the Foreign Exchange Management Act, 1999 (hereinafter called as FEMA) or if the assessee has been permitted to maintain aforesaid NRE account by the Reserve Bank of India (referred to as RBI hereinafter). It was submitted that the assessee was resident outside India under the relevant provisions of FEMA. It was further submitted that the Assessing Officer was satisfied with the conditions of this section and that is why no addition was made by the Assessing Officer. Our attention was also invited to the order passed by Ld. CIT(A) in the case of assessee for A.Y. 2009-10 wherein factual finding was given by Ld. CIT(A) that assessee was a person resident outside India and this order was accepted by the revenue and no appeal was filed before the Tribunal against this order.
7. Per contra, the ld. DR could not controvert the factual submissions of the assessee and could not controvert that the order of Ld. CIT(A) of A.Y. 2009-10 was accepted by revenue and no appeal was filed against the said order before the Tribunal.
8. We have considered the submissions made by both the sides and gone through the orders passed by lower authorities. It is noted that section 10(4)(ii) provides that interest income earned on NRE account shall be exempt under certain situations. The relevant part of provisions is reproduced below:
“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included –
(1) to (3) .........................................
(4) (i) ................................................
(ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with (the Foreign Exchange Management Act, 1999], and the rules made thereunder: Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act or is a person who has been permitted by the Reserve Bank of India to maintain the aforesaid 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 doubt that the assessee is a resident in India as per section 6 of the I.T. Act. However, provisions of section 10(4)(ii) reads as under:
“......in the case of an individual, any income by way of interest on moneys
(ii) in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with (the Foreign Exchange Management Act, 1999], and the rules made thereunder: Provided that such individual is a person resident outside India as defined in clause (q) of section 2 of the said Act ort is a person who has been permitted by the Reserve Bank of India to maintain the a foresaid Account;”
8. Apparently, the assessee satisfies both the conditions. The assessee also gets support from CBDT Circular No.592 dated 04.02.1991.Therefore, the interest income accruing to the assessee in NRE Account, amounting to Ras.4,46,520/- is not taxable in India. The AO is accordingly directed to delete the addition.”
9. Perusal of the aforesaid findings of Ld. CIT(A) given in A.Y. 2009-10 reveals that assessee was on deputation to India with a subsidiary of M/s Sunlife Assurance Co of Canada. It has been further held that assessee was a person not resident in India as per provisions of FEMA. It has been further held by Ld. CIT(A) that the assessee satisfied both the conditions of section 10(4)(ii) of the Act. It is further noted by us that in the year before us the assessment was done ex-parte and addition was made by the Ld. CIT(A) by way of enhancement. It is further noted that facts have not been properly analysed by Ld. CIT(A) in the impugned year. On the other hand, in the assessment year 2009-10 proper factual analysis were made by Ld.CIT(A) and his order has been accepted by the revenue as per the facts narrated before us by the ld. Counsel. Under these circumstances, we find that the interest income of the assessee is exempt u/s 10(4)(ii) of the Act and, therefore, addition made by the Ld.CIT(A) with regard to interest earned in NRE account is directed to be deleted. These grounds are allowed.
10. Grounds 4 to 7 deal with action of the Ld. CIT(A) in treating the capital gain on sale of shares in mutual fund under Portfolio Management Scheme (PMS, in short) as an adventure in the nature of trade and thereby holding it to be business income as against claim of the assessee 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 30-11-2010 ARA Trading & Investments (P) Ltd vsa Dy.CIT 47 SOT 172(Pune) Manan Nalin Shah ITA 5635/Mum/2009 & Ors dt 23-01-2013
12. It is thus submitted that the impugned amount is assessable under the head “Income from capital gains” and, therefore, order of the Ld. CIT(A) should be reversed.
13. Per contra, Ld. CIT-DR submitted that the frequency of trading in the activities of sale / purchase of shares is actually an adventure in the nature of trade. He submitted that Ld. CIT(A) has rightly considered the facts of the casewherein number of transactions were done by the assessee, and therefore, the resultant income has rightly been taxed under the head “Income from business”.
14. We have gone through the orders passed by lower authorities and submissions made before us by both the sides. The admitted facts are that the assessee is a salaried employee of Sunlife Assurance Company of Canada. It is further admitted that assessee has set his foot in the share market. Under these circumstances, assessee entered into an agreement with M/s Unify Wealth Managment Pvt Ltd for investment in stock market through PMS offered by the Portfolio Manager. Our attention was drawn to various clauses of the agreement to emphasise upon the fact that the whole investment objective of the assessee was to maximise the value of investments of the assessee. It was further shown to us that the Portfolio Manager was appointed for “investment management”. It is further noted that the assessee had made the investment using his own funds and admittedly no borrowed funds were used by the assessee for making aforesaid investment. The only ground taken by the Ld. CIT(A) to treat this as an adventure in the nature of trade was that the assessee had more than 400 transactions and, therefore, assessee’s dealings amounted to adventure in the nature of trade and resultant income was assessable under the head “Income from business”. In reply to the same, the Ld. Counsel had produced before us, various details and documentary evidence to show that due to the use of electronic system of stock exchange the transaction was divided for similar quantities and, therefore, numbers of transactions appearing in the list were larger than the transaction actually entered into by the assessee. The instances were shown with respect to respective shares of Deccan Aviation Ltd & Rayban Sun Optics India 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 employment of Port fol io Management Service for investment in shares, the same would become business income, we are of the opinion that the said issue has been dealt with at length by the Delhi High Court in the case of Radials Internat ional (supra) , wherein, in simi lar facts, the quest ion 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 admit tedly 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 prof its 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 through professionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Prof i ts f rom such investment , ei ther di rect ly or through professionally managed f irm, would st ill remain as prof its 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.”
16. It is further noted by us that in the case of Radials International vs ACIT 367 ITR 1 (Del), Hon’ble Delhi High Court held that PMS agreement is merely an agreement for agency and could not be used to infer any intention to make profits; an intention of the assessee should be inferred holistically from conduct of the assessee and circumstances of the transactions. Similarly in the case of Radha Birji Patel (supra), the coordinate bench had taken a similar view wherein it was held that the transactions carried out under PMS are in the nature of transactions meant for maximisation of wealth rather than negotiating the profits on appreciation in value of shares. It was further held that real nature of PMS is such that the investments 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), accepting the claim of the assessee. These facts were narrated by the Ld. Counsel and were not controverted by the ld. DR and, therefore, they are taken as correct by us.
18. Thus, 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 is directed to be deleted. Grounds 4 to 7 are allowed.
19. Ground 8 is with regard to initiation of penalty. The ground is dismissed as premature.
20. Now we shall take up assessee’s appeal in ITA No.6309/Mum/2014 for A.Y. 2010-11. The solitary ground raised by the assessee is with regard to taxability of interest income earned on NRE account. This ground is identical to grounds 2 & 3 of A.Y. 2008-09; no distinction has been made by the ld. DR on law or facts and, therefore, following our order for A.Y. 2008-09, this ground is allowed and addition made by the AO is directed to be deleted.
20. In the result, appeals filed by the assessee are allowed.
The order pronounced in the open court on this 16th day of September, 2016.