Under PMS, a person appoints a professional portfolio manager to carry out his securities transactions, for which he pays the specified fees to the portfolio manager. Unlike an MF, which has a specific exemption for its income under section 10(23D), the Act has not conferred any such tax benefit on a PMS. In such a situation, the PMS functions merely as a pass-through vehicle and the actual liability of tax emanating from the securities transactions carried out by the PMS is that of the individual owning the securities.
Under these circumstances, a question arises whether the transactions carried out by the PMS on behalf of its clients result in capital gains or business profits for such clients.
As per Circular No.6/2016 dated 29.02.2016 cbdt-clarifies-law-on-whether-surplus-on-sale-of-shares-is-taxable-as-capital-gains-or-business-profits which is as follows.
a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
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