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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.
Worried tax assessees complain about lack of communication with Bengaluru-based CPC
The last date for filing income-tax returns is near. So the rush to file returns is on. However, despite the I-T department's initiative to provide electronic facility (e-filling) for filing returns, the commotion and the confusion just doesn't seem to go away.
R Krishnamurthy submitted his ITR-V (Income Tax Return -Verification) form by ordinary post on 5 May 2011. But he has not received any acknowledgement of receipt from the Income Tax department's Centralised Processing Centre (CPC), in Bengaluru, and is therefore uncertain about the status of his returns.
There are three ways to file the returns electronically. First, using digital signature where no paper return is required to be submitted. Second, is to file without digital signature where ITR-V form is supposed to be submitted to the CPC, Bengaluru, within 120 days of e-filing. This is a single-page receipt-cum-verification form. The third option is to file the papers through an e-return intermediary who would do the e-filing and assist the assessee in this process.
Mr Krishnamurthy sent his ITR-V form by post as his file did not have a digital signature. According to the procedure, on receiving the ITR-V, the CPC must send an e-mail acknowledging receipt.
Mr Krishnamurthy, has repeatedly tried to contact the CPC office on email and even on phone, but without success. Strangely, he did receive an SMS saying that certain documents were sent to him on email, but he says he has not got anything yet.
This is only one of numerous such cases that have been piling up over the past many months and there just does not seem to be anybody who will do anything about this. Some persons have complained about not getting e-receipts for their submissions. Others complain about wrong submission numbers on the e-receipts.
The issue of acknowledgements is all the more important as the CPC does not accept submissions by Speed Post, Registered Post, or by courier, and assessees who do not have a digital signature are required to send their the forms only by ordinary post and people have complained that this is unreliable.
The deadline for filing returns in 31 July 2011
Moneylife sent a detailed e-mail to the CPC seeking a explanation on these issues, but we have not received a reply till the time of publishing this story.
Moneylife reported last week that the Bombay Chartered Accountants' Society is making efforts to take up related issues with the Centralised Processing Centre. (Read, "Bombay Chartered Accountants' Society to take up I-T rectification matter with tax authorities".)
One of the major problems of taxpayers is that they have to communicate with the Centralised Processing Centre based in Bengaluru only through letters sent by ordinary post
A large number of taxpayers across the country face various difficulties in rectifying the intimation issued by the Centralised Processing Centre (CPC) under section 143 (1)(a) of the Income-Tax Act, 1961. In order to find a solution to this and to take up the matter with the appropriate authorities, the Bombay Chartered Accountants' Society (BCAS) has asked its members to send a brief summary of the difficulties faced.
The intimation issued under section 143(1) of the I-T Act authorises the assessing officer (AO) to issue refunds and raise a demand of tax along with interest due strictly on the basis of the returns furnished by the assessee. Any mistake in computing the tax by the taxpayer falls within the scope of the Act. However, it does not cover issues like whether the income covered is chargeable to tax or not, the applicable rate of tax, the income shown as royalty, or business profit, or under any other head within the meaning of the double taxation avoidance agreement between India and other countries.
The problem is compounded in case the intimation is issued by the CPC, as there is no other way to communicate with the AO, except through letters, to a post bag number in Bengaluru. And the taxpayer has no way of knowing whether his letter has reached the appropriate authorities.
The BCAS said in a statement, "It seems that the problem becomes more acute due to lack of clarity about the methodology of getting such mistakes rectified, and on account of the fact that the applications for rectification made by the assessees remain pending without proper action."
According to the chartered accountants' society, among the major mistakes observed in the intimation are not giving credit for tax deduction at source (TDS), adjustment of wrong demand for earlier years based on erroneous records against the legitimate refund due to the assessee in subsequent years, and wrong adjustment while computing gross total income.
BCAS said its taxation committee is actively considering taking up this matter with the appropriate authorities, and in this respect it has requested all members to submit a summary of difficulties, without disclosing the identity of the assessees.
Members of the BCA can also send information about the actual number of pending applications, without citing particulars of individual cases, and the amount involved, in a format available on the society's website before 31 May 2011.