I-T tribunal says individual investing in PMS to be taxed on capital gains and not business income

Pune tribunal favours individual investors in distinction between business transaction and investment transaction. However, this matter will continue to be decided by the assessing officer on a case-by-case basis

The Income-Tax Appellate Tribunal (ITAT) in Pune has held that a person/entity investing funds through Portfolio Management Services (PMS) will be categorised as an investor and not as a person dealing in shares, for the purposes of tax calculation. This implies that an average investor no longer runs the risk of having his PMS investment treated as business income, which used to be charged at a higher rate.

The ITAT held in a recent order that the taxpayer cannot be said to be in the business of dealing in shares merely because the portfolio manager entered into a large number of transactions on behalf of the taxpayer.

According to Ameet Patel, partner, Sudit K Parekh & Co, a chartered accountants firm, "In India, capital gains arising from sale of investments entitles the investor to several tax concessions, but business income is generally subjected to tax at normal rates. This distinction between a business transaction and an investment transaction has considerable significance. In the past couple of years, there has been a lot of litigation in India on this matter. The latest decision of the Pune ITAT is a reasoned and detailed order and is in favour of the taxpayer."

The tax authorities have ruled in a number of cases, where the volume or frequency of transactions is large, that the same should be considered as business of trading in shares instead of an investment activity. On the other hand, the concerned taxpayer would naturally have liked it if the gains from such transactions were treated as capital gains, thereby allowing for lower or no tax. There are several appellate and judicial decisions on this issue which are fact-specific in nature.

The recent case involves the assessee, KRA Holding & Trading, in Pune, where the company had entrusted substantial funds to five portfolio managers. The portfolio managers were granted sole discretion with respect to making investments, but they were not allowed to enter into speculative transactions, or to settle any transactions without giving/taking delivery of shares.

Most of the transactions were carried out through only one of the five portfolio managers. In its books of accounts, as well as its tax returns, the company treated the gains/losses from its various portfolios as capital gains/losses and offered its income for tax accordingly. The assessing officer (AO) and the first appellate authority, commissioner of income-tax (appeals) [CIT(A)], were of the view that the assessee was a dealer in shares and thus, the income from the various transactions was to be taxed under the head 'Profit and Gains of Business and Profession' and not under the head 'Capital Gains'.

The ITAT's decision was based on the fact that the predominant intention of the assessee company was to hold shares as investments and not as stock in trade. The assessee had not traded in shares and was entirely dependant upon its portfolio managers and hence could not be termed as a 'dealer' in shares. The predominant objective was to create wealth on a long term basis and to earn maximum profit out of these investments.

According to the order, accretion to capital does not become income merely because the original capital was invested in the expectation that it would, in due course of time, rise in value. ITAT said the share transactions by the assessee through various portfolio managers were to be classified as investment activity and the income arising from such transactions was to be taxed under 'Capital Gains' and not 'Profits and Gains of Business or Profession'.

It must be noted that such disputes are fact specific and each matter must be decided on a case-to-case basis. The assessing officer will take his own decision on each case of investors who file returns.


‘PE investment deals worth $1.4 billion in May’

According to Grant Thornton, PE deal values amounted to $1.14 billion through 43 deals in May 2011, compared to $0.26 billion by way of 15 deals during the corresponding month last year

The month of May witnessed the highest number of private equity investment deals in more than three years, attracting $1.4 billion, a global consultancy firm says.

According to Grant Thornton, PE deal values amounted to $1.14 billion through 43 deals in May 2011, compared to $0.26 billion by way of 15 deals during the corresponding month last year.

"PE investment volume has witnessed a significant upsurge during May 2011, with the highest number of deals after more than three years," Grant Thornton India Partner and National Leader-Valuation Services CG Srividya said, adding that "there have been several large-sized deals with four investments valued at over $100 million."

In May 2011, 43 PE investments were witnessed, whereas in May 2010, the figure stood at 15 and in May 2009, the level was just a meagre 13 transactions.

On the merger and acquisition front, there were deals worth $4.22 billion last month by way of 55 transactions, against $8.11 billion through 52 deals in 2010, the report said.

The PE investment value so far this year stands at $4.03 billion, around twice the level it was a year ago ($2.65 billion), whereas the total M&A deal value so far this year is comparable to last year.

The month of May was also a month of big-ticket deals, with the top five PE deals accounting for 57% of the total PE deals value and the top five M&A deals accounted for 79% of the total M&A deals value.

"There have been several high value deals this month, with 4 M&A transactions valued at over a quarter billion. We have also seen several new sectors such as shipping & ports and electrical doing large deals," Srividya said.

The same was the case in the PE space as well, where "there have been several large-sized deals, with four investments valued at over $100 million," Srividya added.

The total value of M&A and PE deals in the month of May 2011, stood at $5.38 billion via 99 deals, compared to $8.60 billion by way of 72 deals in the corresponding month of 2010.


SKIL files draft prospectus with SEBI for IPO

The proceeds of the issue would be utilised to retire its debt and to fun expansion plans

SKIL Infrastructure has filed the draft red herring prospectus (DRHP) with market regulator SEBI for its initial public offer through which it plans to raise Rs1,125 crore.

The proceeds of the issue would be utilised to retire its debt and to fun expansion plans, said SKIL in the draft prospectus.

The Nikhil Gandhi-run infrastructure firm, which has pledged its 38.47% stake in Pipavav Shipyard to secure debt, plans to use Rs800 crore of the IPO proceeds to pay its loan obligations.

As of 31 December 2010, the company has a total outstanding debt of Rs1,490 crore. The company is planning to raise about Rs225 crore from private placement prior to its initial share sale.

SKIL holds 45% stake in Pipavav Shipyard, besides equity interest in various power, SEZ and port projects.

ICICI Securities Ltd, JM Financial, Nomura Holdings Inc, SMC Capitals, IDBI Capital Market Services Ltd and Edelweiss Capital are advising the infrastructure firm on the issue.

The company is engaged in the development of Infrastructure projects, which include the Pipavav Shipyard, Pipavav Railways, Pipavav Expressway and Mumbai SEZ.


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