The Delhi High Court in an appeal preferred by the Principal Commissioner of Income Tax observed that the Transactions concerning mutual funds are in nature of investment and not motivated by trade.
The CIT(A) concluded that the gains derived by the respondent/assessee on the transfer of mutual funds were chargeable under the head “capital gains”. Accordingly, the addition made by the AO of Rs.4,28,82,839/- under the head “profits and gains of business or profession” was directed to be deleted.
The Income Tax Appellate Tribunal ( ITAT ) held that the gain made on redemption of mutual funds should be treated as capital gain, not business income.
The counsel for the Revenue submitted that the respondent/assessee intended to trade in mutual funds. This is demonstrable if one considers that the respondent/assessee had invested Rs. 86.19 crores in mutual funds in the period in issue, of which only Rs. 3 crores were invested through portfolio managers. During the period in issue, the respondent/assessee had earned a profit of Rs. 4,31,96,995/- and dividend amounting to Rs. 1,74,24,717/-. Thus, the motive was to earn profit on transactions.
It was also submitted that the dividend earned by the respondent/assessee was incidental to the trade in mutual funds carried out by it. Merely because mutual funds were shown as “investment” in the books of accounts, the gain made on its transfer, offered for tax as capital gain, would not change the nature of the income.
In rebuttal, the counsel for the assessee emphasized the fact that mutual fund investments were capital assets and not stock-in-trade, as found by the two statutory authorities referred to above, and therefore, the gain made could not be treated as business profit.
A Division Bench comprising Justice Rajiv Shakdher and Girish Kathpalia observed that “The CIT( A ) and the Tribunal, after appreciating the material on record, have concluded that the transactions concerning mutual funds were in the nature of investment and not motivated by trade. In this context, the CIT( A ) and the Tribunal, among other things, looked at the transactions from the following prism: quantum of trade, value, purpose, the period for which mutual funds were held, and how disclosure had been made in the books of accounts/financial statements.”
“For the sake of brevity, we are not setting forth the findings returned on the said aspects by these statutory authorities once again. Reference in this regard has been made in the paragraphs above. None of these findings have been assailed before us as being perverse” the Court noted.
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