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TMI Blog2012 (9) TMI 828X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of fair rent of ₹ 20,000/- per month and after allowing statutory deduction of 30% u/s 24, income chargeable under the head house property was computed at ₹ 1,68,000/ - Held that:- As concluded from the facts in the case allowing the benefit of Sec 23(1)(c) to the assessee, it is for the assessee to establish that the property was intended to be let and it remained vacant in the absence of it being occupied by a tenant. Therefore, it cannot be made out that the property was “intended to be let out”. Appeal decides in favour of revenue. Disallowance of expenditure incurred on earning exempt income u/s 14A - Whether the provisions of Sec. 14A are applicable to the expenses incurred in the course of its business merely because earning dividend income when there was no material brought to show that incurred expenditure for earning dividend income which is exempted from taxation – Held that:- Following the decision in case of CCI Ltd (2012 (4) TMI 282 - KARNATAKA HIGH COURT) when assessee has not retained shares with the intention of earning dividend income and dividend income is incidental to the business of sale of shares, it cannot be said that the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and securities transactions was declared as business income. In this factual background, the Assessing Officer treated the short term as well as long term capital gain earned through the investments made through PMS providers amounting to ₹ 3,86,38,849/- (as detailed in para 10 of the assessment order) as income which was liable to be assessed as business income and not under the head Capital gains . The income from such activity declared by the assessee as capital gains was reworked for being assessed under the head business income by allowing deduction for certain expenses amounting to ₹ 22,48,024/- and accordingly income was computed at ₹ 3,63,90,825/- which has since been assessed as business income. The Commissioner of Income-tax (Appeals) has, however, upheld the contentions of the assessee that the gain from investments made through the PMS provider was assessable under the head capital gains and against such stand of the Commissioner of Income-tax (Appeals), Revenue is in appeal before us. 5. The Assessing Officer has made elaborate discussion on the aspect as to why the gain on investments made through PMS provider could not be assessed under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer in law and on facts. As per the assessee, the Assessing Officer failed to appreciate a clear-cut distinction maintained by the assessee with regard to its activities of share dealing which were segregated into business and investment activities. That intention and conduct of the assessee, as reflected through the books of account, could not be ignored to hold that the investment carried out through PMS provider was a business activity. As per the assessee, the Assessing Officer erred in wrongly appreciating the role of the PMS provider. In particular, the assessee pointed out that he was having his share trading business whose income was separately disclosed as business income as distinct from investment activity carried out through PMS provider. It was explained before the Commissioner of Income-tax (Appeals) that the assessee had carried out the entire activity of making investment through the PMS provider out of own funds and there were no borrowings and that the assessee was also making investments directly in mutual funds to get the benefits of dividend income and appreciation in capital. As a policy for investment of funds, the assessee adopted the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain on investments made through the PMS provider has been directed to be assessed under the head capital gains. 7. Against the aforesaid twin findings of the Commissioner of Income-tax (Appeals), the Revenue is in appeal before us. Before us, the learned Departmental Representative, appearing for the Revenue, pointed out that the Assessing Officer was justified in holding that the transactions carried out through the PMS provider were to result in business income, inasmuch as the transaction in shares was carried out by the PMS provider in an organized and systematic manner so as to be viewed as a business activity. In particular, it has been pointed out that the transaction in shares though carried out through the agency of a PMS provider were high in volume, frequency and in an organized manner and, therefore, the same constituted business activity. Apart from making aforesaid submissions, the learned Departmental Representative relied upon the reasoning extended by the Assessing Officer in support of the case of the Revenue which have already been noticed by us in para 5 above and are, therefore, not being repeated for the sake of brevity. 8. On the other hand, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at cost, which shows that the same has not been treated as a stock-in-trade of the business. The learned Counsel emphasized that the intention to act as an investor also stands reaffirmed by a subsequent year development, wherein the capital loss suffered on such activity has not been claimed as a set off against the share trading income offered for assessment as business income. For this aspect, reference has been made to the observations of the Commissioner of Income-tax (Appeals) contained in para 4.1.3 of the impugned order. Therefore, the learned Counsel submitted that the Commissioner of Income-tax (Appeals) has fairly differed with the observations of the Assessing Officer that the volume and frequency of the transactions in this case was not of the manner to be regarded as a business activity. Even with regard to the role of the PMS provider, the learned Counsel vehemently pointed out that the nature of the relationship with the PMS provider in the instant case has been adequately and properly dealt with by the Commissioner of Income-tax (Appeals) and following the decision of the jurisdictional Bench of the Tribunal in the case of ARA Trading and Investment P. Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the relationship between the PMS provider and the assessee cannot be contemplated as that of a mere agent as understood in the common parlance. All decisions regarding investments, its timings etc, are made by the PMS provider and not by the investor per se, though the resultant gain/loss is on account of the assessee investor. In the present case, we may also notice that at the time of engaging the PMS provider, the assessee mandated his Investment Objective which clearly indicates the intention of the assessee behind the parking of funds with the PMS provider. The Investment Objective mandated by the assessee and which forms part of the agreement with the PMS provider has been placed in the Paper Book at page 159 in the case of agreement with DSP Merrill Lynch Fund Managers Ltd. We are tempted to reproduce the same, which is as under, The objective is to achieve reasonable returns over the long term by investing in a focused portfolio of 15-20 stocks with good growth prospects, across various sectors. We do not want exposure to any company in the Information Technology sector and specifically to Patni Computer Systems Limited and PCS Industries Limited. for the reason that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough PMS during the year was 19.06 crores involving 62 scrips, whereas, in the share trading business separately shown by the appellant, the sales turnover was 73.21 crores involving 76 scrips. This shows that in the share trading business activity, the turnover was almost 4 times higher even though the number of scrips were only marginally high. It was emphasized that in the trading activity even though the shares involved were proportionately much less as compared to the turnover, since the intention was to carry on business activity, the same was shown under the head Business income . It also included speculative transaction and day trading, whereas no such transactions were entered into by the PMS. The appellant has also emphasized that i was prudent investment activity of the PMS to buy a target quantity of a particular scrip in small lots for averaging purpose; and it should not be treated as frequent and repetitive transactions. The appellant then goes on to cite the decision of the ITAT, Mumbai Bench in the case of Janak S. Rangwala, 11 SOT 627 in which it was observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant sold the same before the shares becoming ex-dividend. Similarly, in the case of ACC, two particular sale dates mentioned when the scrip was transacted by DSPML, were 24.3.2005 and 16.11.05, whereas the ex-dividend date has been mentioned as 29.3.2006. It cannot therefore be said that the appellant had knowingly sold the shares after declaration of the dividend before it became ex-dividend. Again in respect of shares of Jet Airways, the ex-dividend date has been mentioned as 14.9.2005 by the AO, and the date of sale has been mentioned as 17.10.2005 and 23.1.2006 in the case of two different PMS s. This instance points out to a wrong conclusion by the AO as here the shares have been sold after those have become ex-dividend. Coming to two more instances pointed out by the AO in this chart, shares of Nalco have been sold on 30.3.2006 which was after the ex-dividend date of 23.9.2005; and the sale of ONGC shares by DSPML was made on 30.12.2005, which also is after the ex-dividend date of 1.9.2005. It is, therefore, clear that the instances pointed out by the AO did not support this argument, except in the case of two or three instances, where the sale has been made just before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 83,09,187/- was also shown. In fact, the AO has treated even this LTCG of ₹ 83,09,187/- as Business income, which cannot be justified. On the other hand, depending on the market conditions, vis-a-vis the analysis of the fundamentals of particular scrip, decision may have to be taken to exit at a particular point of time, and to re-enter after a few months on change of fundamentals. This does not mean that it was in the nature of repeated trading activities in the same commodity; in which case there could be multiple repetitions within a few days; or even during the same day. 14. In this context, we find that the Assessing Officer has treated even the gain on investments held for more than 12 months also as business income. Quite clearly as per the statement in respect of gains and investment in shares through PMS provider placed at page 73 of the Paper Book, the holding period goes upto even 18 months before the investment was liquidated. Be that as it may, the factor of period of holding cannot be ascribed to the assessee, inasmuch as it has no control on such decision making in a Discretionary PMS arrangement, because such decisions are taken by the PMS provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income-tax (Appeals) has since upheld the invoking of section 23(1)(c) of the Act by the assessee, following the decisions of the Mumbai Bench of the Tribunal in the case of Premsudha Exports (P) Ltd v. ACIT 110 ITD 158 and of the Pune Bench in the case of Shri Vijay M. Athavale and accordingly, the addition has been deleted. 17. Before us, the leaned Departmental Representative submitted that the Commissioner of Income-tax (Appeals) has not properly appreciated the factual position in the present case, which did not justify invoking of section 23(1)(c) of the Act because there was no effort made to let out the property during the year and, therefore, it cannot be said that the property remained vacant for nonavailability of a tenant or for any other justified reasons. 18. On the other hand, the learned Representative of the respondent assessee has relied upon the reasoning advanced by the Commissioner of Income-tax (Appeals) in deleting the addition in support of his stand. 19. We have considered the rival submissions. Sub-section (1) of section 23 prescribes the manner in which annual value of any property is to be ascertained for the purpose of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, factually in the present case it cannot be made out that the property was intended to be let out as observed by the Tribunal in the aforesaid precedents and, therefore, in our view, the Commissioner of Income-tax (Appeals) has erred in applying the aforesaid decisions in deleting the addition made by the Assessing Officer. Therefore, we set aside the order of the Commissioner of Income-tax (Appeals) and restore that of the Assessing Officer with regard to the impugned addition. Accordingly, the Revenue succeeds on this Ground. 20. In the result, the appeal of the Revenue, vide ITA No 276/PN/11, is partly allowed. 21. In ITA No 275/PN/11 filed by the Revenue in the case of Shri Arihant G Patni, both the issues raised are same as in the case of Shri Apoorva Patni, vide ITA No 276/PN/11. 22. The facts and submissions of rival sides being similar in this appeal, our decision given in the case of Shri Apoorva Patni, vide ITA No 276/PN/11 will apply mutatis mutandis to this appeal also. On the parity of reasoning, therefore, ITA No. 275/PN/11 is partly allowed. 23. In the other two appeals filed by the Revenue in ITA Nos 273/PN/11 and 274/PN/11 in the cases of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Karnataka High Court in the case of M/s CCI Ltd v. Jt. CIT in ITA No 359 of 2011 dated 28.02.2012. 28. On the other hand, the learned Departmental Representative has relied on the orders of the lower authorities in support of the case of the Revenue. 29. We have carefully considered the rival submissions. In the case of M/s CCI Ltd. (supra), the assessee was, inter alia, a dealer in shares and securities and had earned dividend income on shares of certain companies. The Assessing Officer found that the assessee had raised interest bearing loans to part-finance the shares and it had also incurred brokerage for arranging such loans. The Assessing Officer held that such expenditure was directly attributable to the earning of dividend income and invoked section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, to disallow the expenditure The Hon ble High court was seized of the following question in the above background: Whether the provisions of section 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow appropriate relief to the assessee on this count. Thus, on this Ground the assessee succeeds. 30. The last Ground in this appeal is with regard to the closure of share trading business. The assessee claimed that during the year under consideration, he had closed the share trading business as on 31.3.2006 and the entire stock in trade of the shares was transferred to his capital account. The shares were transferred at cost. The Assessing Officer in para 12 of the assessment order did not accept the claim of the assessee of closure of the business of share trading in his proprietary concern. The Assessing Officer further noticed that the assessee had valued the stock at cost while transferring the shares into the capital account and, therefore, there was no effect on the income for the year under consideration. At the same time, the Assessing Officer observed that in future when the shares are sold, the resultant gain would be taxable as income from business and not as capital gains. Against the aforesaid observation of the Assessing Officer the assessee felt agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate on this controversy. Accordingly, the assessee fails on this Ground. 35. In the result, the appeal of the assessee is partly allowed. 36. Now coming to ITA No 193/PN/11 filed in the case of Shri Arihant Patni, both the Grounds No. (1) (2) raised are similar to those dealt by us in the case of Shri Apporva A Patni. In relation to Ground No.(1) involving disallowance under section 14A, we have held above that no disallowance under section 14A is called for and in that view of the matter, the said Ground has been decided in favour of the assessee. On the parity of reasoning, we hold so and thus the assessee succeeds on Ground No. 1. 37. Similarly in respect of Ground No. (2) relating to closure of share trading business of the assessee, we have affirmed the finding of the Commissioner of Income-tax (Appeals) that since the observation of the Assessing Officer had no implication in respect of the current year s assessment of income, no adjudication was called for on the said issue. On the parity of reasoning, we hold that the Commissioner of Income-tax (Appeals) made no error in refraining to adjudicate on this controversy. Accordingly, the assessee fails on this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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