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TMI Blog2014 (9) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... unsustainable both in facts and law and contrary to the law declared by the Hon'ble High Court of Bombay in the case of Gopal Purohit. 3. It is submitted that the learned Commissioner of Income Tax (Appeals) committed a grave error of law in sustaining the order of the Assessing Officer holding that the dividend received by the Appellant from PMS is also receipt which is incidental to his business. 4. It is submitted that the learned Commissioner of Income Tax (Appeals) erred in holding that whether the activities carried out by the firm, be named as "investment in shares" or otherwise are part of business activities to be carried out by the firm as per section 4 of The Partnership Act, 1932 as well the deed of partnership thereby suggesting that every income the firm is business income. TREATING LONG TERM CAPITAL GAINS OF RS. 43,57,622/- AND SHORT TERM CAPITAL GAINS OF Rs. 30,45,835/- AS BUSINESS INCOME. 5. It is submitted that the learned Commissioner of Income Tax (Appeals) erred in sustaining the order of the Assessing Officer that the Appellant was a dealer in shares and therefore their income from this activity was assessable under the head "profits and gains fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head 'Short Term Capital Gains' should not be treated as business income. In his reply dated 24/11/2010 the AR has furnished the following explanation: 1. Our assessee is an investor in equity shares and mutual funds for more than three years, 2. Our assessee has given a sum of Rupees to ASK Investment Managers Pvt Ltd on 16/12/2005 and to Alchemy Capital Management Pvt Ltd on 21/12/2005 as PMS. They are managing the investments ill shares. 3. Assessee has shown investment in shares of Rs. 1,22,90,071/- in the AY 2006-07 and the same is accepted by the learned ITO as a investor, Scrutiny Order is attached. In AY 2006-07 there was a short term capital loss of Rs. 18,828/- and the same is not C/f as the return is filed late. 4. In the AY 2007-08 there was a Short Term Capital Gain of Rs. 6,78,172/- and investment in shares of Rs. 1,46,68,799/- and the same is accepted u/s143(1). 5. In the AY 2008-09 there is a short term capital gain of Rs. 30,16,243/-. As looking to the details of short term gain the shares are held for more than 5 to 6 months and the same are reflected in the Demat A/c of the PMS. 6. Assessee is investing in shares and MF's through PMS only. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble High Court was as under :- "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-discretionary portfolio, the manager has full discretion to invest in respect of the client's account in any type of security, and make such changes in the investments as he deems fit. Clause 18 (b) of the agreement states that the manager shall "not be responsible for any loss or expenses resulting to one person as client, from the insufficient 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 intention to re-sell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. 12. As indicated here, while a transaction may be motivated by the intention to resell at an enhanced value, it would 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 manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 Rulings(AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- (i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds. This Court notices from Annexure 4 (p. 90) that the following is the volume of transactions on the basis of holding period. 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 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. 5. The Hon'ble Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment. 6. We had also gone through the portfolio investment management agreement entered by the assessee, according to which in case of portfolio management services, the portfolio manager exercises discretion as to the investment or the management of the portfolio of securities or the funds of the clients, as the case may be. Thus, as per the terms of agreement, the assessee has no control over the investment being made by the portfolio investor. The assessee puts his money with the portfolio manager, who makes investment as per the market study of their team of experts. We also found that as per the terms, the portfolio manager does not give any guarantee of profit or loss. We also found that out of total transactions of 220 during the year under consideration, 65 transactions was for holding less than 90 days, 42 transactions was for holding between 90-180 days, 36 transactions was holding between 181-365 days and 77 transactions was holding for more than 365 days. Thus, the percentage to total quantity works out to be 29.55 for less than 90 days, 19.09 for 90-180 days, 16.36 for 181-365 days and 35.00 for more than 365 days. Out of the total capital gains so earned i. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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