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TMI Blog2012 (9) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... t with a view to do trade. Assessee also made direct investments in shares and there was short term capital gain and long term capital gain being accepted by department. Considering the scheme of Portfolio Management, it is observed that investments made by the assessee through PMS is meant for maximization of wealth and not with a view to do trade in purchase and sale of shares. Further, department has not disputed the fact that the Portfolio Manager have the sole and absolute discretion to make the investments for and on behalf of the assessee and the assessee has no role to play on the same. The assessee has not taken any borrowing for making investments for placing its funds with Portfolio Manager. Very nature of PMS is such that investments made by the assessee cannot be said to be scheme of trading of shares and stocks and, accordingly, the profit is to be assessed under the head ‘capital gains’ - Decided in favor of assessee - ITA No. 6166/Mum/2008, ITA No. 2125/Mum/2008 & ITA No. 4126/Mum/2008 - - - Dated:- 6-7-2012 - B. R. Mittal And Rajendra , JJ. Appellant by : Nitesh Joshi Respondent by: D. S. Sunder Singh , Kusum Ingale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irms and income is exempt under section 10(2A) of the Income tax Act, 1961. The assessee is also director in Safety Guidance (India) Pvt Ltd., Cospha Care Chemicals Pvt Ltd., and Nalin Pharmaceuticals Pvt Ltd., 7. During the assessment year 2003-04, assessee placed fund of ₹ 50,00,000 with M/s. Kotak Securities (PMS) as his Portfolio Manager for purchase and sale of shares. The assessee derived income from PMS account of ₹ 52,127 and while filing the return offered the same under the head business and profession . During the course of assessment proceedings, the assessee vide letter dated 25.11.2005 stated that income from PMS is to be assessed under the head capital gains . The AO did not accept the contention of the assessee and treated the income/earning on PMS account as business income of the assessee. The assessee filed appeal before ld CIT(A). 8. On behalf of assessee, it was contended that assessee is a partner in two partnership firms carrying on business of Indenting Agent . He is also director in Private Limited Companies. The assessee invested a portion of his capital amounting to ₹ 50,00,000 in Portfolio Management Scheme of Kotak Securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in capital account has been invested directly in shares, bonds and units of mutual funds and the department has accepted the capital gains shown by the assessee from investment in shares and mutual funds made directly by the assessee. The Assessing Officer has disputed the earning through PMS only. Ld A.R. submitted that holding period of most of the shares and units of Mutual Fund was for more than 2 months. Ld A.R. also referred pages 30 31 of PB, which is a copy of agreement entered with Kotak Securities and submitted that as per clause 2 of the agreement, assessee has authorized the portfolio manger at their sole discretion to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made by them on behalf of the assessee. He further submitted that clause 3 of the agreement further authorized to hold all or any of such investments in its name. He further referred to clause 6 of the agreement and submitted that the portfolio manger will make every effort to maximize the value of investment. He further submitted that as per clause 9 of the agreement, Portfolio Manger will provide the assessee with quarterly statement of the inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares and for the alleged activity entirely dependant upon portfolio manager appointed to look after its investments then in such peculiar circumstances is it legally justifiable to hold that the assessee can be said to be a dealer in shares. In such a scenario their investment is never termed as a trading in a day to day share transaction by the member of mutual fund. In the present case as well the object is to maximise the value of the portfolio held by the company as the status of the company as well undisputedly declared as an investment company. 23. An another obstacle which is to be removed or to be dealt with is that in a situation when there is frequent reshuffle in the investment by the portfolio manager then in such a condition when the primary intention was to increase the value of the assets held as investment whether can be termed as the business activity; as defined in the statute and also deliberated upon by several Hon ble Courts, by the investor, in this context two facts have significantly emerged one is that the entire investment was out of the past corpus earned in the form of dividend, therefore, accepted position is that the assessee was holding shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of investment. The Court has said that such a question was not question of law but mixed question of law and fact. Therefore, on due consideration of the relevant facts the result was that the assessee was a prudent investor and not of a plunger in the waters of trade. The intention of the assessee was considered as that of nursing of the investment. 26. Before we conclude a significant fact does need some deliberation and that is about the method of valuation of stock of shares reflected in the balance sheet. The admitted position is that the assessee has not adopted the method of valuation as being generally adopted by a business concern. A business asset is valued at the cost or market price whichever is less but in the applicant case it was not so, The appellant had not adopted this prevalent method. Rather the assessee had opted to value the shareholding at cost price only. The law subscribes to treat such an asset as an investment generally being valued by an investor. 27. To conclude, the circumstances and the plethora of precedents unmistakably points out that the assessee was not directly involved in the trading activity. Therefore its holding wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , let us say the assessee buy 1000 shares and this purchase is split over 10 transactions from different persons , while over all transactions is of only one purchase 100 shares, the statement reflect of the individual component of the transaction and will thus show a misleading high figure. Keeping it in mind all these factors as also the entirety of the case, we are in considered agreement with the conclusions arrived by the CIT (A) which needs no interference. Grievances raised by the Assessing officer are thus rejected. 11. He submitted that the gains arisen on transfer of shares and units of Mutual Fund covered by the Portfolio management scheme should be considered as giving rise to capital gains and business income. 12. However, ld D.R. supported the orders of authorities below. He submitted that the assessee himself claimed income arising out of PMS transaction as business income. He submitted that no revised return was filed by the assessee and only by way of a letter dated 25.11.2005 at the time of assessment proceedings asked for changing head of income. He submitted that the authorities below in view of the decision of Hon ble Supreme Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but in the case of the assessee, the assessee also made direct transactions giving rise to capital gains and the same has been accepted by the department and the only dispute is with regard to transaction put through the Portfolio Manager. Ld A.R. further submitted that the decision of Hon ble A.P. High Court in the case of PVS Raju(supra) is also not applicable to the case of the assessee as in that case, it was decided considering the factors, which weighed given in paragraph 15 of the said judgment that the transactions were business transactions and the said factors do not exist in assessee s case. He submitted that in the case of the assessee, buying and selling of shares is not frequent through PMS and the average period of holding in the case of the assessee is more than two months as against 1-7 days in the case of PVS Raju (supra). He further submitted that the relevant clauses of the PM Scheme bring out that the intention of the assessee is to make investment and not trading in shares. Ld A.R. further submitted that the decision of ITAT Mumbai in the case of Mafatlal Fabrics Pvt Ltd(supra) relied by ld D.R. is not applicable to the facts of the case of the assessee as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be considered by ld CIT(A) on the basis of the facts and as per provisions of law. The Hon ble P H High Court in the case of Ramco International(supra) has held that non-filing of the revised return of income should not come in the way if all the relevant facts are available on record. Considering the above decision, we decide the issue before us on merits on the basis of facts placed before us. 16. We observe that assessee entered into a PMS agreement with Kotak Securities in A.Y. 2003-04 and as per clause 2, PMS is authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investments made on behalf of the assessee. Further clause 3 of the agreement further authorizes to hold all or any of such investments in its name or at its discretion on behalf of the assessee. Further as per clause 6 of the agreement, it is stated that the portfolio manger will make every effort to maximize the value of investment. Clause 9 of the said agreement stipulates that Portfolio Manger will provide the assessee with quarterly statement of the investments. On perusal of the contents of the agreement, we observe that assessee has placed funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s funds with Portfolio Manager. We agree with ld A.R. that the decision of ITAT Delhi Bench in the case of Radials International (supra) relied upon by ld D.R. is not applicable to the facts of the case as in that case, the Tribunal observed that holding period of shares by Portfolio Manager ranges from 2 days to few months at the most and the number of transactions were huge. Therefore, the transactions were found to be not investment but an adventure in the nature of trade. However, in the case before us, ld A.R. has stated the relevant facts, which we have discussed hereinabove, and on that basis, we agree with ld A.R. that said decision of Delhi Bench of the Tribunal is not applicable to the case of the assessee. Similarly, the case of Hon ble A.P. High Court in the case of PVS Raju vs ACIT(supra) is not applicable to the facts of the case of the assessee as in that case, the Hon ble High Court considered the relevant factors, which are mentioned in para 15 of the said order and on that basis, the Hon ble High Court confirmed the order of the Tribunal that the volume of share transactions were in the ordinary line of business of purchase and sale of shares and not for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term capital loss of ₹ 3,17,52,245 on transfer of units of US-64 on the ground that the income from US-64 is exempt /s.10(33) and the loss claimed is notional. Under the facts and circumstances of the case the long term capital loss of ₹ 3,17,52,245 ought to have been computed and allowed to be carried forward. 3. On the facts and circumstances of the case, ld CIT(A) erred in confirming the interest charged u/s.234C of the I.T.Act. 19. At the time of hearing, ld counsel for the assessee submitted that Ground No.2 is not pressed for, therefore, the same is dismissed as not pressed. 20. In respect of Ground No.1 of appeal, ld A.R. submitted that dividend income of ₹ 2,36,279 is exempt in A.Y. 2004-05 u/s.10(34) of the Act. In respect of speculation income of ₹ 1,81,936 shown by the assessee, he submitted that same is also not disputed. However, in respect of profits and gains from PMS, ld A.R. submitted that assessee appointed besides Kotak Securities, Prudential ICICI Asset Management Company Ltd., as its Portfolio Manager and placed ₹ 1 crore with it and also entered into an agreement, copy placed at pages 105 to 135 of PB. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. In respect of speculation loss of ₹ 50,692 shown by the assessee, he submitted that same is also not disputed. However, in respect of profits and gains from PMS, ld A.R. submitted that assessee appointed besides Kotak Securities, and Prudential ICICI Asset Management Co. Ltd., Kotak Fortune Equity as its Portfolio Manager and placed ₹ 75,00,000 with it and also entered into an agreement. Ld A.R. submitted that agreement entered into with Kotak Fortune Equity is substantially similar to agreement entered into with Kotak Securities and whatever decision is taken in respect of A.Y. 2003-04, for the income earned through PMS will apply mutatis mutandis to the income earned by the assessee in A.Y. 2005-06. ld A.R. further submitted that in the return of income for A.Y. 2005-06, assessee has shown income from PMS under the head capital gain unlike for A.Y. 2003- 04. He further submitted that for A.Y. 2005-06. assessee also made direct investment for purchase and sale of shares/units and had short term capital gain of ₹ 1,52,07,330 and long term capital gain of ₹ 92,62,088 and the department accepted the same as capital gain and the dispute is only in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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