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TMI Blog2014 (5) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... crual of about 81% of the total gains to the assessee - only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits - a large volume of the shares purchased were intended towards the end of investment – the contention of the revenue that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year cannot be accepted - the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions - even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/purchased in those transactions – thus, the Tribunal had erred in holding the transactions to be income from business and profession – Thus the order of the Tribunal is set aside – Decided in favour of Assessee. - ITA No. 485/2012 - - - Dated:- 25-4-2014 - S. Ravindra Bhat And R. V. Easwar,JJ. For the Appellant : Mr. Kaanan Kapur, Advocate. For the Respondent : Mr. N. P. Sahni, Sr. St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesse (profits from trade less the PMS charges, treated as expenses wholly and exclusively for the purpose of business), second, that penalty proceedings under Section 271(1)(c) were to be initiated and third, that the claim for rebate under Section 88E, as an alternative, was to fail since no evidence of the Securities Transaction Tax paid was furnished. It was reasoned that the purpose of a portfolio manager was to optimize returns of the investor. Since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade 4. The Commissioner of Income Tax (Appeals) ( CIT(A) )held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made was a mere enhancement of value by realizing a security or a gain made in operation of business in carrying out a scheme for profit-making . It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o hold shares as investment. The portfolio manager has carried out trading in shares on behalf of his clients to maximize the profits. Therefore it cannot be said that shares were held by the assessee as investment. 13. Merely because the purchase and sale of shares had occurred through DEMAT account on delivery based; it would no change the nature of the transaction. Since the portfolio manager in the capacity of an agent has traded in shares on behalf of the assessee, the profits arising therefrom, will be in the nature of business profits. Further simply because the assessee has treated the deposits made under PMS as investments and balance shares lying in DEMAT account as on the last day of the accounting year under the head investment‟ would not change the character of trading done by the portfolio manager on behalf of the assessee. The shares purchased and sold during the year have not been recorded in the books of accounts as investment nor is it feasible to record as the details were not available with the assessee and the assessee has no control or say as to when and the type of shares or the period of holding of the shares. Therefore in our considered opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deficiency of value of or title to any property or security acquired or taken on behalf of the client . While the agreement entered into between Radial and Reliance appears to be a discretionary portfolio, as indicated in clause 9 (by which client unconditionally and irrevocably grants power of attorney to the portfolio manager to make decisions on the investments), clause 10 states that the portfolio manager provides no warranty as to the appreciation of the securities in which he applies the client s funds. Therefore, it is clear that a PMS agreement can be an instrument by complete authority and discretion over the transactions to be entered into, is surrendered to the portfolio manager by the investor. 9. From the terms of the agreement it does not emerge that the intention of the investoris to make profits. The terms on the other hand, indicate that regardless of the level of discretion handed over to the portfolio manager, there is neither any guarantee that the securities invested in will appreciate nor is the portfolio manager responsible to the client for any loss from the deficiency of value of the securities. Thus, the PMS agreement at best, embodies the inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be possible to evaluate whether the transaction was actually in the nature of trade, until the securities are actually resold. Moreover, in a discretionary PMS, it becomes all the more relevant and necessary to evaluate the intention of the assessee in conjunction with his conduct and other circumstances, since the intention of the assessee cannot be ascertained at the time of depositing the money in the investment, because the actual sale and purchase of securities happens at the hands of the portfolio manager, a mere agent. 13. Second, since the intention of the assessee cannot be ascertained, and the investments are made by the portfolio manager without the knowledge of the assessee/investor in a discretionary PMS, the manner in which the securities have been treated by the assessee can and ought to be evaluated only post the fact of investment, and not at the time of depositing the money. This proposition is supported by the judgment of the Supreme Court reported as CIT-Calcutta v. Associated Industrial Development Company, AIR 1972 SC 445 = (1971) 82 ITR 586 (SC), in which it was held that: it was open to the assessee to contend that even on the assumption tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociation is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade;but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. 11. Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss 236,121.87 803,149.68 2,446,125.84 2,217,955.77 5,723,353.16 Percentage of CG/L to total CG/loss 4.12% 14.03% 43.09% 38.75% 20. It is clear thus, that about 71% of the total shares have been held for a period longer than 6 months, and have resulted in an accrual of about 81% of the total gains to the assessee. Only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment. This Court is not persuaded by the argument of the Revenue that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year. This is because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions. Moreover, even if only a small number of transactions resulted in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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