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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 ..... trades in tyres. For the assessment year 2006-07, the assessee had declared a total income of Rs.3,17,80,943/- on 31.10.2006. The AO, after selecting the case for scrutiny assessment, found on 18.11.2008 that the gains realized by the assessee on sale of shares were in the nature of business income, and not capital gains. The assessee, in its reply to the AO stated that the shares were depicted as investments and not "stock in trade" in the accounts of the assessee and hence the gains resulting from their sale were to be considered capital gains. The assessee also attempted to produce evidence to show that the intention had not been to earn trading profit: first, the investment was undertaken by the assessee with its own surplus funds, and not borrowed funds, and second, that the holding period for a majority of the transactions was substantial. Moreover, the assessee sought to show that the relationship between the investor (the assessee) and the investment manager (the portfolio manager), as indicated by the agreements entered by Portfolio Management Schemes ("PMS"), was one of principal and agent. It was also sought to be shown that since the transactions made by the PMS were de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly gives the account quarterly on the basis of which the investor comes to know about the profit earned and the securities in which the transactions were done by the port Folio manager on behalf of the assessee. The shares purchased and sold are credited and debited to the DEMAT account of the party, which remains in the control of portfolio manager. It is the portfolio manager who can only deal with the DEMAT account of a particular person. At the time of depositing the amount the assessee will definitely make entry in his books of account as investment in PMS. But he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. The portfolio manager charges his fee for the services rendered and other expenses incurred on the same lines as is done in a case where the agent charges from his principal. Since the assessee comes to know about the purchase and sale of shares in the PMS after the expiry of a period of three months, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the transactions must be considered by themselves, while applying the tests to determine whether they are investments or adventure in the nature of trade. It is urged that the PMS agreement, by its terms alone or by the fact of agency being handed over to the portfolio manager, cannot be the basis for inferring an intention to profit or that the transactions are in the nature of trade. The Revenue, on the other hand, emphasizes that the fee paid to the broker is more than the return on the property, thus indicating that the portfolio management scheme itself is one intended to earn profit. Of the total of 1248 transactions that have taken place in the relevant period, the Counsel urges that there were on average, about 4-5 transactions daily, only 8 of which entailed a holding period of longer than 365 days. Thus, it is urged that the order of the Ld. ITAT must be upheld. 8. This Court has considered the submissions of both parties. At the outset, it would be pertinent to note some of the relevant terms of the PMS agreement. Clauses 7(b) and 7 (c) of the PMS agreement between Radial and Kotak Securities Ltd. indicate that only in a discretionary portfolio, unlike in a non-discre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infers that "it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment".The reasoning of the Ld. ITAT does not find favour with this Courtfor three reasons. 11. First, the three reasons provided by the ITAT merely convey that intention to hold shares as investment cannot be inferred from the agreement. However, the fact that no inference of an intention to invest can be made from the agreement does not translate to the intention to trade in shares for profit either. As was noted in Raja Bahadur KamakhyaNarain Singh v. CIT-Bihar, (1969)3SCC791 = (1970) 77 ITR 253 (SC) : "The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but, in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by way of investment. The assessee can only show that the holdings in question were always treated as an investment (despite having made a profit on clearing them) post the fact of investment. It would also be necessary to acknowledge that the characterization of a transaction, i.e as a portfolio management scheme or investment, itself is not determinative. It is settled law that nomenclature of a document or deed is not conclusive of what it seeks to achieve; the court has to consider all parts of it, and arrive at a finding in regard to its true effect (Ref. Puzhakkal Kuttappu v. C. Bhargavi & Ors AIR 1977 SC 105 and Faqir Chand Gulati, Appellant(s) V. Uppal Agencies Pvt. Ltd 2008 (10) SCC 345). In the income tax law, the position is no different, as can be seen from the judgment of the Supreme Court in CIT Vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC), following Duke of Westminister (1935) 19 Tax Cas. 490 and Commissioner of Inland Revenue Vs. Wesleyan & General Assurance Society (1948) 16 ITR (Supp.) 101. 14. Lastly, the way in which the tests are to be applied was made clear in the CBDT Circular no. 4 of 2007, which states: "8. The Authority for Advance Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be used to infer any intention to make profit b. The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money c. Along with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade 18. Therefore the block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade. 19. Coming to the facts of this case, it is not contested that the source of funds of the assessee were its own surplus funds and not borrowed funds. This Court notices from Annexure 4 (p. 90) that the following is the volume of transactions on the basis of holding period. Period of holding < 90 days 90-180 days 181-365 days >365 days Total Quantity of shares 32,750 18,063 38.140 90.649 179,602 Percentage to total quantity 18.23% 10.06% 21.24% 50.47% G ..... X X X X Extracts X X X X X X X X Extracts X X X X
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