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TMI Blog2015 (5) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... e. We concur with the ld CIT(A) that this interpretation of the assessing officer is incorrect. The assesse having made investments and consequent to such investments some incentive is received. Treatment of that incentive income will not change the nature of the investments. On the contrary, this receipt of incentive itself confirms the fact that this assessee has earned incentive consequent to investments being made, which is normally given to the investor. - Decided against revenue. Portfolio management - Held that:- The assessee has made investments through portfolio management in five cases, and out of these five cases, the assessee has suffered losses in two cases to the extent of ₹ 21,65,551/- and has made gain in three cases of ₹ 36,04,177/- with the result that the net gain on account of portfolio management is only ₹ 14,38,626/- out of the total capital gain of Rs.l,76,03,580/-. The investment in portfolio management is a common feature and cannot be held to be a business. Another reason of the Assessing Officer is that assessee has prepared books of account, Profit and Loss Account and Balance Sheet and has got the same audited. There is nothing wron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst revenue. - ITA No.4691/Del/2011 - - - Dated:- 27-4-2015 - Shri N. K. Saini And Shri A. T. Varkey,JJ. For the Appellant : Sh. B.R.R. Kumar, Sr. D R For the Respondent : Shri Ved Jain, Sh.Rano Jain,CA and Sh. V. Mohan, CA ORDER Per A. T. Varkey, Judicial Member This appeal filed by the Revenue is directed against the Order dated 06.6.2011 passed by the Ld. CIT(A)-XXVI, New Delhi pertaining to assessment year 2007-08. 2. The Revenue has raised the following grounds in its Appeal:- 1. The order of the CIT(A) is not correct in law and facts. 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law as well as in facts in directing the AO to treat the income of ₹ 1,76,03,581/- declared by the assessee as short term capital gains only and not as business income without properly considering the arguments and facts as mentioned in the assessment order. 3. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as in facts in ignoring the fact that the assessee during the course of assessment proceedings vide his letter dated 4.12.2009 has stated that the Management fees of ₹ 41,88 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the Ld. CIT(A), now the Revenue is in appeal before the Tribunal. . 6. Ld. DR relied upon the order of the AO and reiterated the contention raised in the grounds of appeal raised by the Revenue. 7. On the contrary, Ld. Counsel of the assessee has relied upon the order of the Ld. CIT(A) and defended the same and does not want us to interfere in the same. 8. We have heard both the parties and perused the records. The ground no. 1 being general nature, hence, needs not adjudication. 8.1 Ground No. 2 is relating to treating the income of ₹ 1,76,03,581/- declared by the assessee as short term capital gains and not as business income as held by the AO is concerned, we find that the ld. CIT(A) appreciated the facts of the case by taking into account the details of sale, purchase and investment in shares, the intention of the assessee, various case laws and circulars of CBDT in this regard. The CBDT circular No.4/2007 has referred to various principles laid down by judicial authorities in order to enable making distinction between shares held for trading and shares held as investments and have clarified that total effect of all the principles should be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year under consideration, according to the assessee firm it has made various investments in mutual funds of various companies. The ld AR pointed our attention to a list of various companies along with summary of transactions done and capital gained on the same were shown to us. According to the ld AR, all shares purchased were duly transferred to the DMAT account of the assessee firm and all the transactions were done by investment in mutual funds or through Portfolio Management Scheme (PMS). The ld AR pointed out that a huge amount of dividend has been earned during the year under consideration i.e. ₹ 42,77,597.73/-. Further it was submitted by the ld AR that as and when the opportunity arose, the assessee firm sold the shares in the open market. According to him, the said gain was in the nature of short term capital gain which was duly offered for taxation in the return of income filed by the assessee firm for the year under consideration. 8.2 The reasoning given by the assessing officer to treat the said income as business income is mainly because that the assessee has made huge volume of independent purchases and sale of shares and mutual funds and the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the Assessing Officer has relied on the definition of the word 'Partnership' as per The Indian Partnership Act, 1932, as relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all. To bolster his conclusion that the income accrued to the assessee firm is business and not investment. The definition given by the Indian Partnership Act cannot override the provisions of the Income tax Act and the nature of income as per the Income Tax Act. The assessment of income has to be made under the various heads of income as per the scheme of the Income Tax Act. If the AO s view has to be taken then it was, interest income for purposes of sec 80HHC, 80lA, 80lB etc. be taken to be business income entitled to deduction and not treated as income from other sources. Further it would mean that no income of the firm would be assessed under the head capital gains, rental income or income from other sources, which would create absurd reasoning. Therefore the ld CIT(A) has rightly held that assessing Officer has wrongly relied on the definition of partnership as defined in the Indian Partnership Act, 1932, to decide the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the income from the sale have been shown as income from capital gains because the intention of the assessee was to make investments in mutual funds and securities and earn income from capital gains, dividends etc. The intention of the partners for deriving income from investments is borne out by the following facts (as noted by the ld CIT(A) in Page 31 of the impugned order: The partners are carrying on the business of manufacture and sale of sound proof generators, electrical panels, etc. in the name of 'Jaksons' and group turnover is in excess of ₹ 500 crores. Since they were busy in the said business investments were made through the assessee firm. The partners have put in their own capital of ₹ 52.5 Crores (approx.) for investment purposes out of their surplus funds. No borrowed funds were invested. The investments have been basically made in mutual funds and Portfolio Management Schemes (PMS). The trading in derivatives was done by PMS Managers and not by partners. The amount has been shown as 'Investments' in the books of accounts and in the Balance Sheet. Income under the head short term capital gains/loss, dividend and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, i.e., delivery based and non-delivery based. Also, by. treating the delivery based transaction as an investment, the assessee clearly established that it did not take the first step as a trader, hence, the result of the delivery based transaction was treated as short term capital gain depending upon the period of holding of such shares. The ld DR could not assail the said finding of the ld CIT(A) by bringing any evidence to the contrary from the assessment order of the AO or other evidence in this behalf. 15. The ld CIT(A) has rightly held that the tests of badges of trade evolved by Royal Commission of England and approved by the Hon'ble Supreme Court are also met by the assessee. In order to buttress its contention, the ld AR contended that (1) An equity share of Indian Companies is not essentially a trading commodity. More often than not shares are purchased by Indian public as an investment. While held for long period the shares yield regular income in the form of dividend. It may, however, be noted that some holders buy and sell shares by way of trade and not investment. (2) Where shareholding is for trading, frequency of purchase and sale scrip- wise is very high an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is premature sale, i.e., the sale within a few days or weeks from purchase, there is always some specific reason such as downtrend in market sentiments over a' particular scrip or industry. Such transactions, however, in the case of the assessee are few and far in between. The effort in respect of delivery based transaction is always to hold the shares initially allotted for as long as it may be sensible to hold them. As already explained, the motive of the assessee in delivery-based transactions is always investment. Surrounding circumstances of the assessee's transactions support the view that in delivery-based transactions, the assessee has been acting as an investor. These shares are always transferred in the name of the assessee. Generally, the shares are not sold until it becomes necessary to exit or otherwise due to long holding, the shares have become ripe for realization of profit. In all cases, deliveries are invariably taken and given; full price is paid and collected. There is hardly any involvement of borrowed capital. To sum up, there is no presumption that a transaction in shares was for a trade and the correct position was that ordinarily equity shares were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment and not closing stock that the closing balance have been valued at cost and not at cost or market value whichever is lower , that no borrowed funds have been used etc. the income from investment may be treated as income from capital gains and not as income from business. 23. Ld. CIT(A) has observed that the AO has wrongly stated that the assessee has traded in derivatives which cannot be treated as investment. On perusal of the records, it is noticed that the transactions in respect of derivatives are not part of the short term capital gain. These have been separately quantified as business transactions and on this aspect a letter dated 4th December, 2009, has also been filed with the assessing officer clarifying this position. 24. The Assessing Officer has reasoned that the assessee firm has earned incentive income and this incentive income has to be assessed as business income and the other income shall also become business income. We concur with the ld CIT(A) that this interpretation of the assessing officer is incorrect. The assesse having made investments and consequent to such investments some incentive is received. Treatment of that incentive income will not cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned, we find that Ld. CIT(A) has observed that during the assessment proceedings, the assessee had surrendered and offered for taxation an amount of ₹ 41,88,451/- on account of Portfolio Management Fees being not allowable u/s 48 of the Act while calculating income from capital gains as per following details:- l. Kotak PMS Fees Rs.5,84,124/- 2. HDFC PMS Fees ₹ 8,43,965/- 3. IClCI PMS Fees Rs.27,60,362/- Rs.41,88,451/- 29. Ld. CIT(A) has further observed that the Assessing Officer has noted that the above expenditure incurred by the assessee on PMS becomes allowable once the income on sale of shares, mutual funds, units was held to be business income as against capital gain claimed by the assessee. Therefore, the sum of ₹ 41,88,451/- was allowable as deduction against business profits as already claimed by the assessee in return of income and was, therefore, not added back to the income from business even though surrendered by the assessee before the AO. In view of the aforesaid facts and circ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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