Recently, High Court of Delhi in Yama Finance Ltd.vs Assistant Commissioner of Income Tax held that investment in mutual fund cannot be clubbed with investment in shares or commodities as it is a “special category” of investments. Further, it held that surplus arising thereon from sale of mutual funds held for more than two years would be treated as long term capital gain and not business income.

Facts of the case:

The assessee, dealer in shares, had also invested and sold mutual funds. He also derived income from interest, dividend and surplus realized on sale of shares and mutual funds and had invested in these funds and shown them in its investment account. The surplus from the sale of these mutual funds had been treated as long term capital gain by the assessee. The Assessing Officer rejected said claim and treated it as business income. But the Commissioner (Appeals) allowed the assessee’s appeal. The Tribunal however, allowed the revenue’s appeal holding that the profits from the sale of these mutual funds amounted to business income. Therefore, an appeal was made to High Court for the same.

It was held that:

It was stated that investments in mutual funds are of an entirely different kind and cannot be clubbed with sale of shares or commodities. One often underlined and widely used test is the ‘volume, frequency, continuity and regularity’ of the transaction test. This is in addition to other indications such as maintenance of separate portfolios in the same set of books of account for ‘investments’ or maintenance of separate books of account for the two activities and whether borrowed capital was used. Having regard to these and the further fact that the assessee had kept these amounts separately in an investment account and held these mutual funds for about two years, the Court was of the opinion that the Tribunal clearly fell into error in holding that the amount of was business income and not long-term capital gains as was rightly concluded and held by the Commissioner (Appeals).  Learned counsel for the Revenue supported the findings of the Tribunal and stated that the mere circumstance that the assessee showed the mutual funds in the investment account could not be conclusive of these aspects.

Learned counsel highlighted that apart from the fact that the mutual funds were held for almost two years, other indicators clearly showed that the transactions did not result in business income. It was submitted that the mutual funds units were not tradable and had to be redeemed from the issuing concern or the fund house. Furthermore, submitted learned counsel that no borrowed funds had been used and right through the accounts kept in these mutual funds have been clearly demarcated as investments.

For these reasons, the question of law framed was answered in favour of the assessee and against the Revenue.