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TMI Blog2010 (9) TMI 492X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are acting in the ordinary course of their business. - This shall not apply if such broker or agent carries on in that other State an activity descripted in paragraph 4 wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises which are controlled by or have a controlling interest in it. Father of assesssee - assessee’s father was 76 years old and was a retired person. He has not acted on behalf of the assessee. This has not been rebutted by the department. If AO had any material he should have called Mr. Sevantilal S. Shah and examined him. But nothing like that has been done to prove that assessee’s father constituted PE. Occasionally he might have signed cheques and that itself would not construe him as PE of the assessee. - Decided in favor of assessee. - ITA Nos. 3229 & 3230/Mum/2009 - - - Dated:- 7-9-2010 - T.R.SOOD, A.M SHRI R.S.PADVEKAR, JM. JJ. Assessee by : Mr. Mayank Priyadarshi. Revenue by : Mr. Sushil U.Lakhani. ORDER Per T.R.SOOD, AM: In both these appeals identical grounds have been raised and even issues involved are identical. Therefore, with the consent of both the parties, I.T.A.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y earlier because it was a booming market, and therefore, assessee sold the shares in small lots. All the transactions were only in the listed securities on delivery basis and not even a single transaction was intraday transaction. The funds invested in the shares were assessee s own funds and no borrowings have been made. Some legal submissions were also made and reliance was placed on various case laws, particularly, in the decision of AAR in the case of Fidelity Northstar Funds Others In RE [288 ITR 641], wherein it was held that gains made under FII scheme were to be treated only as capital gains because the investment was not for trading. Reliance was also placed on the following decisions: (a) Leeming Vs. Jones (15 TC 333) (b) CIT vs. Holck Larsen [160 ITR 77 (SC)] (c) G. Venkataswami Naide Co. Vs. CIT [35 ITR 594 (SC)] (d) Raja Bahadur Visheshwar Singh Vs. CIT [41 ITR 685 (SC)] (e) CIT Vs. Rewashanker A. Kothari [283 ITR 338 (Guj.)] (f) CIT Vs. ESS Jay Enterprises (P) Ltd. [165 Taxmann 465 (Del.)] (g) Janak S.Rangwala Vs. ACIT [11 SOT 627] (h) ACIT Vs. B.N.Rathi Securities Ltd. [71 ITD 31 (Hyd.)] (i) ACIT Vs. Krishna Kumar Bangur [(2004) 87 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that substantial systematic or organized investment would constitute business. He also referred to various other case laws and ultimately concluded that from the volume of transaction and frequency of transaction, it is clear that assessee was engaged in systematic and organized manner of dealing in shares with a profit motive and, therefore, same was held to be assessable as income from business. 5. On appeal before the CIT(A), submissions made before the AO were reiterated and it was emphasized that though shares were purchased for a long term basis, because of booming market the target price has reached much sooner than expected and that is why such shares were sold in smaller lots which also led increase in the frequency of transactions. It was also emphasized that most of the gains were made out of the shares obtained through IPO. Before the ld. CIT(A) also following case laws were relied- (c) In G. Venkataswami Naidu Co. Vs. CIT [35 ITR 594 (SC)], the Hon ble Apex Court held that all cases where there was an intention to resell at a profit are not cases of adventure in the nature of trade. In cases where the intention to resell is coupled with an intention to hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y with a set purpose such as earning profits. 6. Reference was also made to CBDT s Circular No.4 of 2007 and it was pleaded that from above cases laws and circular it was clear that income from the sale and purchase of shares was clearly assessable under the head capital gains. 7. The ld. CIT(A) after examining the submissions observed that assessee was a NRI having full time business of manufacturing and export of jewellary. The assessee had only invested surplus money from such jewellery business in the Indian share market subject to the regulations of RBI SEBI. The assessee had regular exposure to the market in the earlier years also and total funds invested in various years were as under: 30-03-2004 3.38 crores 31-03-2005 1.82 crores 31-03-2006 5.50 crores 31-3-2007 7.59 crores He also observed that most of the gains are out of investments in preliminary market [IPO] where a normal trader would not put his funds. He also noted the observation of Hon ble Supreme Court in the case of G.Venkataswami Naidu Co. vs. CIT [35 ITR 594] that in cases where intention to resale is coupled with the intention to hold the test of advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not to trade in shares to earn business profits but to investment in shares for appreciation. On the basis of above, he held that profit from the share transaction was assessable only under the head capital gains 8. Before us, Ld.DR submitted that the CIT(A) has mainly allowed the relief because in earlier years also assessee had made investments in shares and the same was taxed under the head capital gains . But it is not necessary that if share transactions were held as investment transactions in one year, then in next year also same was to be held as investment transaction only and in this respect he referred to the decision Hon ble Supreme Court in the case of New Jehangir Vakil Milk Co. Ltd. Vs. CIT [49 ITR 137], wherein it was observed that even if the assessee was treated as investor till 1943 it will not stop the assessing authority from considering for the computation of profit under the head business in 1944. He also submitted that basically what has to be seen is the nature of transaction, volume of transaction and frequency of transaction. Merely because RBI did not permit trading in shares in the case of the NRI, it cannot be said that assessee was not do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hah vs. CIT [117 Taxman 188] wherein it was held that if shares were treated as investment and not as stock-intrade then profit on such shares has to be held as capital gains. Further in the case of Sarnath Infrastructure Pvt. Ltd. Vs. ACIT [120 TTJ 116] wherein it was observed that where assessee had two portfolios, one as investment portfolio and another as trading portfolio and valuation of the same was done separately and in the case of investment portfolio the valuation was on cost only and assessee had earned dividend income, then profits from investment portfolio are required to be assessed as capital gain only. He also referred to the decision of Bombay Bench in the case of Janak S. Rangwalla vs. ACIT [11 SOT 627] wherein it was held that even if the volume and magnitude of transaction was higher then that would not alter the nature of transaction, particularly, when such transaction was treated as in the nature of investment in the earlier year. He argued that the decision of the Hon ble Supreme Court in the case of New Jehangir Vakil Milk Ltd. [supra] is distinguishable in view of the later decision of the Hon ble Supreme Court in the case of Raja Bahadur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business income; (ii). whether the applicant could be regarded as having a permanent establishment in India (iii) If the income is found to be in the nature of business income whether the applicant will be taxable in India; and (iv) whether the income from the portfolio investments would be taxable in India at the fixed rate of 20 per cent under section 115AD of the Income Tax Act, 1961. And the answers given by the authorities are as under: (i) That the transactions were only in the nature of investment in capital assets to earn capital gains because (a) the whole scheme meant for FIIs was to invest in securities in India to receive income from them so long as they hold the same and realize capital gains on their transfer. (b) the expression "Income received in respect of securities" in cl. (a) connotes the income therefrom when the securities held by a FII are intact, e.g. dividends, interest, etc. like fruits from a tree or a rent from an immovable property. The term income employed therein, having regard to the context, can, by no stretch of imagination, be assumed as income arising from the transfer of such securities for the simple reason that such type o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the context in which they are used, do not deal with the subject of trading in securities much less do they permit activities of trading in securities by a FII. In the case before us also the RBI has issued the following directions which have been intimated to the assessee by HDFC Bank through their letter which has been filed before us. NRIs/OCBs have to take delivery of the shares/convertible debentures and give delivery of the shares/convertible debenture sold under the scheme and are not allowed to trade. The above clearly shows that when as per the SEBI regulations [in the case before us RBI regulations] the assessee was not permitted to do in trading then gains received from sale and purchase of shares can be only taxed as capital gains. 13. We further find that Hon ble Bombay High Court in the case of Gopal Purohit [supra] has held that though the principles of res judcata is not attracted because each assessment year is separate entity, but there ought to be some uniformity in treatment and consistency when the facts and circumstances are identical. In the case of the assessee in the earlier years also share income was held be on account of capital gains. Under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Vishaka Patnam Port Trust [144 ITR 416]. Alternatively, he observed that since the assessee has done transaction in shares through M/s Sushil Finance Consultancy Ltd., Mumbai and Mr. Amol Joshi was looking after all the share transactions of the assessee by tracking the daily price movement of the company on assessee s behalf. On enquiry it was submitted that relation between the assessee and M/s Sushil Finance Consultancy Ltd., is that of a client and broker and services rendered by him like keeping track pf price movements, giving advice etc. are in the ordinary course of the business of a broker. However, AO referred to para-1 of Article 5 of DTAA between India and Thailand which contained the following conditionsa) The existence of place of business. b) The place of business must be fixed i.e. it must be established at the distinct place with certain degree of permanence. c) The business of enterprise must be carried on through this place of business. AO again observed that since Mr. Amol Joshi was keeping track of daily price movement of the company on behalf of the assessee and all necessary work regarding share trading activity was done from office of M/s Sushil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot signed any contract. It was also argued that if an agent simply signs a contract after taking approval of its principal then no PE would be constituted and in this regard reliance was placed on Sutron Corporation In. RE 268 ITR 156 [AAR]. It was also pointed out that in the case of Western Union Financial Services Inc. vs. Addl.DIT 101 TTJ 56 and Director of IT [I.T] vs. Morgan Stanley Co. Inc. 292 ITR 460, it has been observed that if an agent simply implements on source country the contracts which were concluded by the foreign principal outside the country, then no PE would be there in the form of an agent. It was pointed out that dependent agent would mean an agent who is legally and economically dependent on the principal. 19. After considering the rival submissions, ld. CIT[A] accepted the submissions of the assessee by the following para: In view of the above factual position and legal views relied on by the appellant, I am convinced to hold that there is no factual or legal base to conclude that the appellant s father constituted agency P.E. or in the alternative the share broker constituted fixed place P.E. In short the appellant had no P.E. at all in India during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee argued that AO has not controverted this statement and has not brought any material on record to show that assessee s father would constitute his PE. He also reiterated the submissions that assessee s father was not dependent on the assessee and in any case at best the contracts were being executed outside India and merely giving an authority would not make him PE. In this regard also the case laws relied before the CIT[A] were reiterated. 23. We have considered the rival submissions carefully and find force in the submissions of the ld. counsel of the assessee. We wonder as to why the AO has not brought the out come of the enquiry conducted with Mr. Amol Joshi, Client Relationship Manager of M/s Sushil Finance Consultancy Ltd, on record. The ld. DR has not denied of such enquiry, but at the same time he has not brought the out come of the enquiry to our notice. In any case, we fail to understand that simply by stating that Mr. Amol Joshi was tracking the price movements of the shares and was advising the clients to make the share broker of the assessee as his PE. The movements in share prices can be monitored by anybody in the world by opening any commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting more than 183 days. 3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include: (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or deli very; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise. 4. Notwithstanding the provisions of the preceding paragraphs a person (other than a broker, general commission agent or any other agent of an independent status to whom paragraph 5 applies) acting in a Contracting State on b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. But nothing has been brought on record by the AO as to how the father of the assessee acted on behalf of the assessee. In fact, as observed earlier, enquiries made with Mr. Amol Joshi have not been brought on record. Further an affidavit in the form of Annexure-6 was filed and various averments read as under: I am father of Mr. Samir S. Shah [hereinafter referred to Samir ] having PAN ACEPS 6596. R, who is presently settled at Bangkok, Thailand. ii. I am retired since 21 years (Twenty one year). Till retirement I was employed as Assistant Manager with Champion Engineering Mumbai, post retirement, I am pursuing my hobby of painting. iii. Though for convenience sake, my son Samir has given me a General Power of Attorney, I have so far not used this power of Attorney for any transactions in stock market relating to my son Samir. iv. Without prejudice to the generality of the above, I confirm that I have not bought or sold any shares on the stock market on behalf of my son Samir. v. Being one of the authorised signatory of Samir s Bank A/c. No.0011220003572 with HDFC Bank Ltd, Tulsiani Chambers, Nariman Point, Mumbai 400021. I have at times only signed cheq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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