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Whether the income obtained as facilitator is taxable

Ravi (Manager) (23 Points)

28 December 2020

Dear All,

I have a query. For instance, I have pooled up some money from the savings of my friends and relatives who pay the taxes duly, and I have outsourced it as an investment for 10% returns to a trader/PMS to generate income through trading. And the trader/PMS paid the STT, GST and the short/long term capital gain taxes on the trading income and then he pays me back the invested amount plus 10% returns. Finally I pay the original principal amount that I took from the friends and relatives back to them after an year, do I need to pay the tax on the profit (10% returns) I obtained on this transaction being a facilitator, as I see the taxes were duly paid on both ends of the transaction. i.e. Income tax will be paid from my friends and Tax on trading income is paid by the trader.

Regards

Ravi

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3 Replies

Fazil Ahmad (75 Points)
Replied 29 December 2020

Ofcourse you have to pay income tax on 10% income that you have earned in the whole process

CA Salman Ansari (Salman Ansari & Assoc.) (247 Points)
Replied 29 December 2020

Whether this profit will be taxable in your hands or not depends on the nature of this facilitator arrangement. If it is clear from the arrangement that your role is that of an agent, and you assume no risks and guarantee no returns, but are rather in a pure representative / advisory capacity, then the gain will not be taxed in your hands, and you will be taxed only w.r.t. any fees or commission you charge for this service. In determining whether you are acting in a representative/advisory capacity, factors like in whose name the title of the investments are held are taken into consideration.

Whereas if you acquire the investments in your own name, or assume any risk for such investments, or are guaranteeing a certain level of returns regardless of the actual performance of the investment, then your services are no longer in the nature of advisory/agent, and the income will be taxed in your hands, regardless of who the income is further transferred to. Kindly note two interesting implications of this type of arrangement:

1) Since the investments were not held in the name of friends and relatives, there will be no capital gain for them, and no tax payable thereon. The capital gain tax will be levied on you.

2) If you treat the savings given to you as one year loans and treat the repayments as including of 10% interest, then section 36(1)(iii) allows deduction of interest from dividends received on investments. Hence, unless the nature of 10% appreciation of investment is in the nature of capital gain (i.e. not as dividend), the 10% return will not be taxed in your hands as the exact same amount is deducted as interest. Further, the principal repayment will also attract no tax provided you received the amount through an account payee cheque or a bank draft, or by electronic transfer through a bank account.

Hence, even in the second method, the only tax payable should be by the actual investors and the income shall be income in the nature of interest.

Hope this helps.

Ravi (Manager) (23 Points)
Replied 29 December 2020

Thank you all for the quick responses. I appreciate it.

Dear Ansari,

I have gone through your entire explanation and I feel there are some loose ends between your understanding and my problem statement. So, I wanted to re-explain it clearly, so that I want to know if your opinion still holds good.

Friends ---- > Not investors, just friends and so gave me as a loan with 0% interest, i.e. as a monetary help for a limited period of time, which I need to repay after the time period. They gave it out of their savings after paying tax on salaries.

Myself -------> I shall pool up the entire amount and I approach a known investor/trader Mr.X. This Mr.X, promises me to pay me 10% of the amount that I invest. This amount is the same that I obtained as a help from my friends.

Mr.X ----------> He does trading/investments in his own name and PAN, and he is liable to pay or pays the entire taxes (STT, GST, Captal Gain Taxes etc) at his end. Now, he pays me the 10% returns from the profit left after the taxation, along with the initial investment I invested with him, in the stipulated time period that we agreed upon initially.

Myself--------> I shall retain 10% returns with me and pay back the principal amount that I took from my friends back again.

End of the Transaction.

Every transaction takes place through the online banking channels only.

Now, considering this scenario, please explain me how am I liable to the amount that I received after taxing it at Mr.X's end already. He just shares the amount from his profit after the tax. Doesn't it count as dual taxation if I have to pay taxes on it again?

Do I need to maintain any book of accounts or audit for my scope of transactions??

Best Regards

Ravi