M/s. Radials International, New Delhi V. ACIT, New Delhi

ITA 1368/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53488 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 30-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-03-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B KISHORE
• Keywords: Business income; Business expenditure; Advance ruling; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH F DELHI ] BEFORE SHRI RAJPAL YADAV, JM AND SHRI K. D. RAN JAN, AM I. T. APPEAL NO. 1368 (DEL) OF 2010 ASSESSMENT YEAR : 2006-07. M/S. RADIALS INTERNATIONAL, ASSTT. COMMISS IONER OF INCOME-TAX, 80 / 1, BLOCK II, W H S KIRTI NAGAR, VS. C I R C L E : 27 (1), N E W D E L H I. N E W D E L H I. P A N / G I R NO. AAA FR 0154 J. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI RAKESH NANDA, C. A.; DEPARTMENT BY : SHRI B. KISHORE, SR. D. R.; O R D E R. PER K. D. RANJAN, AM : THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 20 06-07 ARISES OUT OF ORDER OF THE LD. CIT (APPEALS)-XXIV, NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE AS FOLLOWS :- 1. THE ORDER PASSED BY THE LD. CIT (APPEALS) , NEW DELHI UNDER SECTION 250(6) DISMISSING THE APPEAL AGAINST THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 BY THE LD. ACIT ASSESSING THE TOTAL INCOME FOR ASSESSMENT YEAR 2006-07 AT RS.3,37,26,993/- AND RAI SING THE DEMAND OF RS.16,36,716/- IS BAD IN LAW AND NEEDS TO BE QUASHE D; 2. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING TRANSACTIONS RELATING TO SALE / PURCHASE OF EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME AS AN ADVENTURE IN THE NATURE OF TRADE AND NOT AS A SALE OF INVESTMENTS; 2 I. T. APPEAL NO. 1368 (DEL) OF 2010 3. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THE LONG TERM AND SHORT TERM GAINS / LOSSES ON SALE OF EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME AS BUSINESS INCOME AND NOT UNDER THE HEAD CAPITAL GAINS; 4. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THE CHARGING OF TAX ON THE GAINS / LOSSES ON SALE O F EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME AS BUSINESS INCOME AND NOT UNDER THE HEAD CAPITAL GAINS; 5. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THAT THE EXEMPTION UNDER SECTION 10(38) ON LONG TER M CAPITAL GAINS ON SALE OF EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME IS NOT ALLOWABLE; 6. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THAT TAX AT CONCESSIONAL RATE OF 10 PER CENT UNDER SECTION 111-A ON SHORT TERM CAPITAL GAIN ON SALE OF EQUITY SHARES UNDER PO RTFOLIO MANAGEMENT SCHEME IS NOT APPLICABLE; 7. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THE INITIATION OF PENALTY UNDER SECTION 271(1)(C) A ND ALLEGED FURNISHING OF INACCURATE PARTICULARS OF INCOME AND THEREBY CONCEA LING INCOME; 8. THAT LD. CIT (APPEALS), NEW DELHI HAS ER RED IN FACTS AND LAW IN HOLDING THE CHARGING OF INTEREST UNDER SECTION 234-B OF RS. 3,45,345/- AND 234-D OF RS.13,200/-. 3. THE FIRST ISSUE FOR CONSIDERATION RELATES TO CON FIRMING THE STAND OF THE ASSESSING OFFICER THAT THE TRANSACTIONS INVOLVING SALE AND PURCHASE O F SHARES UNDER PORTFOLIO MANAGEMENT SCHEME [PMS] ARE ADVENTURE IN THE NATURE OF TRADE AND NOT A SALE OF INVESTMENTS. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE HAD SHOWN SHO RT TERM CAPITAL GAIN OF RS.35,02,080/- AND SHORT TERM CAPITAL GAIN OF RS.22,17,955.06 ON SALE OF SHA RES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT THE ASSES SEE HAD MADE NUMEROUS PURCHASE AND SALE OF SHARES DURING THE RELEVANT PREVIOUS YEAR. ON A QUE RY RAISED BY THE ASSESSING OFFICER IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE WAS ENG AGED IN THE BUSINESS OF PROVIDING TECHNICAL, MARKETING AND MAINTENANCE SERVICES FOR EARTH-MOVERS TYRES AND TRADING IN TYRES. THE SUBSTANTIAL PART OF ITS INCOME WAS GENERATED OUT OF ABOVE BUSIN ESS OF THE ASSESSEE. THE ASSESSEE HAD INVESTED THE SURPLUS FUNDS GENERATED OUT OF PROFITS OF ITS ABOVE BUSINESS IN MUTUAL FUNDS AND SHARES EITHER DIRECTLY OR THROUGH PORTFOLIO MANAGEM ENT SCHEME OF KOTAK AND RELIANCE ETC. AND SUCH INVESTMENTS HAVE BEEN CLEARLY SHOWN UNDER THE HEAD INVESTMENTS ON THE ASSETS SIDE. THE 3 I. T. APPEAL NO. 1368 (DEL) OF 2010 SURPLUS FUNDS IN THE PAST WERE INVESTED IN THE FIXE D DEPOSITS WITH THE BANKS AND THE SAME HAVE BEEN PARTLY INVESTED IN MUTUAL FUNDS. THEREFORE, T HE INTENTION OF THE ASSESSEE WAS TO EARN DIVIDEND FROM SUCH INVESTMENTS. THE INVESTMENTS IN MUTUAL FUNDS WERE HELD BY THE ASSESSEE AS INVESTMENTS AND NOT STOCK-IN-TRADE. 4. THIS CONTENTION OF THE ASSESSEE WAS TURNED DOWN BY THE ASSESSING OFFICER RELYING ON CBDT CIRCULAR NO. 4 DATED 15/06/2007 AND DECISION O F AUTHORITY FOR ADVANCE RULING REPORTED IN 288 ITR 641. HE NOTED THAT THE ASSESSEE HAS PUR CHASED AND SOLD SHARES WITH THE MOTIVE OF EARNING PROFIT. THE HOLDING PERIOD OF SHARES DURIN G THE RELEVANT PREVIOUS YEAR RANGED FROM TWO DAYS TO A FEW MONTHS AT THE MOST. IT WAS EVIDENT T HAT THE OBJECT OF THE INVESTMENT IN THESE SHARES WAS NOT TO DERIVE INCOME BY WAY OF DIVIDEND, BUT TO EARN PROFIT THROUGH SALE AS IN ALMOST ALL THE TRANSACTIONS THE SHARE BOUGHT WERE SOLD IN SHORT P ERIOD OF TIME. THE ASSESSING OFFICER THEREAFTER EXAMINED THE NATURE OF PORTFOLIO MANAGEMENT SCHEME AND DUTIES OF PORTFOLIO MANAGER. HE NOTED THAT PORTFOLIO MANAGER PROCEEDS SYSTEMATICALL Y TO MANAGE ON AN 0NGOING BASIS THE COLLECTION OF SECURITIES IN HIS CUSTODY IN TUNE WIT H MARKET VARIATIONS TO OPTIMIZE IN THE RETURN OF PROCESS. HE CARRIES OUT REGULAR FOLLOW-UP TRADING O PERATIONS, SELLING SECURITIES ON HAND AND / OR BUYING NEW ITEMS OF SECURITY BASED ON THE SENTIMENT S AND MOVEMENT OF THE STOCK MARKET. IN FACT HE MAKES SIZEABLE PROFITS THROUGH THESE SUPPLE MENTARY FOLLOW-UP OPERATIONS. HE CHOOSES TO BUY SECURITIES WHEN THE MARKET IS BEARISH AND SELLS OR OFF-LOADS THOSE SECURITIES WHEN MARKET IS BULLISH. THIS ENABLES HIM TO SECURE CONSIDERABLE T RADING PROFITS WHICH RESULTS IN THE VALUE ADDITION TO HIS HOLDINGS. THE LD. ASSESSING OFFICE R IN VIEW OF THESE FACTS CAME TO THE CONCLUSION THAT THE TRANSACTIONS WERE NOT OF INVESTMENT BUT AN ADVENTURE IN THE NATURE OF TRADE. THE SHARES WERE PURCHASED WITH THE SOLE INTENTION OF SELLING T HEM AND NOT TO HOLDING THEM AS INVESTMENT. THE ASSESSING OFFICER, THEREFORE, TREATED THE PROFI TS ARISING ON PURCHASE AND SALE OF SHARES UNDER PMS AS BUSINESS INCOME. THE ASSESSING OFFICER ALSO HELD THAT IT WAS NOT POSSIBLE FOR AN INVESTOR TO HAVE TWO PORTFOLIOS I.E. TRADING AS WELL AS INVE STMENT. ONCE THE NATURE OF INCOME HAS BEEN DETERMINED AS INCOME FROM TRADING, THEN THERE WAS N O RATIONAL JUSTIFICATION FOR TREATING INCOME FROM SHARES HELD FOR MORE THAN 365 DAYS AS LONG TER M CAPITAL GAINS. THE ASSESSING OFFICER, THEREFORE, DID NOT ALLOW THE BENEFIT OF LONG TERM C APITAL GAINS IN RESPECT OF SHARES OR UNITS OF MUTUAL FUNDS HELD FOR MORE THAN ONE YEAR. 4 I. T. APPEAL NO. 1368 (DEL) OF 2010 5. ON APPEAL BEFORE THE LD. CIT (APPEALS) IT WAS SU BMITTED THAT THE TRANSACTION OF PURCHASE AND SALE OF EQUITY SHARES UNDER PMS WERE DELIVERY B ASED MEANING THEREBY THE DELIVERY WAS TAKEN ON PURCHASE AND SIMILARLY DELIVERY WAS GIVE N ON SALE OF SHARES AND THE SAME WERE DULY REFLECTED IN THE STATEMENT OF DEMAT ACCOUNT WITH NA TIONAL SECURITIES DEPOSITORY LTD. IT WAS SUBMITTED THAT SINCE THE ASSESSEE HAD TAKEN AND GIV EN DELIVERY OF SHARES, THE SAME COULD NOT BE TREATED AS TRADING ACTIVITIES. THE LD. CIT (APPEAL S) NOTED THAT THE ASSESSEE IN THE RELEVANT YEAR WAS A DEBT FREE ENTITY EXCEPT CAR LOAN. THE ASSESSE E WAS CARRYING ON BUSINESS OF PROVIDING TECHNICAL, MARKETING AND MAINTENANCE SERVICES FOR E ARTH MOVERS, EARTH MOVER TYRES AND TRADING IN TYRES SINCE 1987. THE ASSESSEE HAD PURCHASED AND S OLD SHARES OF VARIOUS COMPANIES IN HUNDREDS OF TRANSACTIONS DURING THE ASSESSMENT YEAR UNDER CO NSIDERATION. THE BROKERS M/S. KOTAK SECURITIES LTD., RELIANCE CAPITAL AND FORTIS HAD CH ARGED FEE IN LIEU OF TRANSACTIONS CARRIED ON BEHALF OF THE ASSESSEE. THE ASSESSEE HAD ALSO PAID SHARE TRANSACTION TAX ON TRADING OF SHARES. THE ASSESSEE HAD NOT CLAIMED FEE PAID TO BROKERS AND SH ARE TRANSACTION TAX ETC. AS BUSINESS EXPENDITURE AS IT APPEARS THAT THE SAME HAVE BEEN D EBITED IN THE ASSESSEES ACCOUNT BY THE BROKER / SERVICE PROVIDER. THE RESULT THEREOF HAS BEEN SHO WN AS SALE CONSIDERATION. ALL TRANSACTIONS OF PURCHASES AND SALE OF SHARES WERE UNDERTAKEN BY THE ASSESSEE THROUGH PROFESSIONAL PORTFOLIO MANAGERS UNDER PMS. THE INVESTMENT IN EQUITY SHARE S WAS STARTED IN ASSESSMENT YEAR 2005-06, WHICH WAS ACCEPTED UNDER SCRUTINY AND ASSESSMENT YE AR 2006-07 WAS THE SECOND YEAR OF TRADING. THE INVESTMENT IN MUTUAL FUND HAD BEEN CONSIDERED A S CAPITAL INVESTMENT AND INCOME DERIVED THERE-FROM HAS BEEN ASSESSED AS CAPITAL GAIN DURING THE PREVIOUS YEARS AS WELL AS DURING RELEVANT YEAR. ONLY THE NATURE OF INCOME DERIVED FROM SALE / PURCHASE OF EQUITY SHARES HAS BEEN DISPUTED BY THE ASSESSING OFFICER. 6. AS REGARDS THE CLAIM OF THE ASSESSEE THAT INCOME DERIVED FROM SHARE TRADING HAS BEEN ASSESSED AS CAPITAL GAINS IN THE PRECEDING YEAR, LD CIT(A) HAD HELD THAT MERELY BECAUSE THE TAX AUTHORITIES HAD ASSESSED IT AS CAPITAL GAIN IN PREC EDING YEAR WOULD NOT IN ANY WAY OPERATE AS RES- JUDICATA TO PRECLUDE FROM HOLDING THE SAME AS BUSIN ESS INCOME IN SUBSEQUENT YEAR. HE PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF NEW JAHANGIR VAKIL MILLS VS. CIT 49 ITR 138 (SC); RAJA BAHADUR VISHWARIA SINGH V S. CIT 41 ITR 685 (SDC); AND DALHAUSI 5 I. T. APPEAL NO. 1368 (DEL) OF 2010 INVESTMENT TRUST CO. LTD. VS. CIT 68 ITR 486. HE A LSO OBSERVED THAT THE TRANSACTIONS DEALING IN SHARES IS A MIXED QUESTION OF LAW & FACTS AND THE L EGAL EFFECT OF FACT ON WHICH THE ASSESSEE COULD BE TREATED AS A DEALER OR AS INVESTOR IS A QUESTION OF LAW . HE PLACED RELIANCE ON SEVERAL DECISIONS IN SUPPORT OF THE CONTENTION. THE LD. CIT (APPEALS ) FURTHER OBSERVED THAT WHEN WHAT IS DONE IS NOT MERELY A REALIZATION OR A CHANGE OF INVESTMENT, BUT AN ACT DONE IN WHAT IS TRULY THE CARRYING ON OF A BUSINESS, THE AMOUNT RECOVERED AS APPRECIAT ION WILL BE ASSESSABLE AS BUSINESS PROFIT AS HELD IN THE CASE OF RAJABAHADUR VISHWESHARA SINGH ( SUPRA). IN SUCH A SITUATION WHAT IS TO BE FOUND OUT FOR SUCH DETERMINATION IS WHETHER AT THE TIME OF PURCHASING A PARTICULAR LOT THE ASSESSEE HAD AN INTENTION TO SELL IT SUBSEQUENTLY AT PROFIT OR ONLY TO MAKE AN INVESTMENT. THE PRESENCE OF COMMERCIAL MOTIVE IS A PRIMARY LEGAL REQUISITE. TH IS COMMERCIAL MOTIVE IS ESTABLISHED BY THE FACT THAT THE ASSESSEES FOCUS HAS NOT BEEN ON EARN ING THE DIVIDEND ON THE INVESTMENTS; RATHER REAPING THE PROFITS OUT OF VOLATILITY OF THE MARKET . PURCHASE AND SALE AS A BUSINESS DEAL IS ANOTHER REQUISITE. AN INTENTION TO MAKE PROFIT NORMALLY IN SPIRES TRADE AND COMMERCE. SIMILARLY, HABITUAL DEALING IS ORDINARILY INDICATIVE OF TRADE AND COMME RCE. ALSO THE MAGNITUDE AND FREQUENCY AND THE RATIO OF SALES TO PURCHASE AND TOTAL HOLDING IS EVIDENCED FROM WHICH THE AUTHORITIES CAN COME TO THE CONCLUSION AS TO THE TRUE NATURE OF ASSESSEE S ACTIVITIES IN SUCH SITUATION. THE LD. CIT (APPEALS) EXAMINED THE FACTS OF THE ASSESSEES CASE IN THE LIGHT OF DECISION OF HONBLE SUPREME COURT AND OBSERVED THAT FROM THE DETAILS OF PURCHAS E AND SALE OF SHARES ENUMERATED IN ANNEXURE TO ASSESSMENT ORDER AND DETAILS SUBMITTED BEFORE HI M, THE ASSESSEE AT THE TIME OF PURCHASING THE SHARES HAD AN INTENTION TO SELL THEM SUBSEQUENTLY A T A PROFIT. THIS COMMERCIAL MOTIVE IS ESTABLISHED BY THE FACT THAT THE ASSESSEE SOLD BOUG HT AND SOLD SHARES AFTER HOLDING THEM FOR A SMALL PERIOD. THEREFORE, THE INITIAL INVESTMENT WA S UTILIZED FOR PURCHASE AND SALE OF SHARES IN SUCH A WAY WHICH RESULTED IN PROFIT DERIVED FROM BU SINESS AND PROFESSION. SUCH AN INTENTION WAS CLEARLY DISCERNIBLE FROM THE FACTS OF THE CASE. 7. REGARDING THE CONTENTION OF THE ASSESSEE THAT AC TUAL DELIVERY WAS GIVEN AT THE TIME OF PURCHASE AND SALE AND, THEREFORE, THE TRANSACTIONS WERE IN THE NATURE OF INVESTMENTS. IN THIS REGARD THE LD. CIT (APPEALS) OBSERVED THAT THE ASSE SSEE ACQUIRED SHARES AND SOLD. THEY WERE NOT HELD AS PROPERTY WHICH YIELDED TO ITS OWNER AN INCO ME OR PERSONAL ENJOYMENT MERELY BY VIRTUE OF ITS OWNERSHIP AS THE FEE PAID TO THE BROKER WAS MOR E THAN THE RETURN ON THE PROPERTY EXCLUDING 6 I. T. APPEAL NO. 1368 (DEL) OF 2010 RETURN ON ACCOUNT OF TRADING OF THE PROPERTY. THER EFORE, THE SHARES WERE ACQUIRED WITH THE OBJECT OF A DEAL. A LARGE NUMBER OF SHARES WERE SOLD IN S HORT PERIOD. ALL THESE FACTS CLEARLY SHOWED THAT THE ASSESSEE WAS ENGAGED IN DEALING IN SHARES. AS REGARDS THE FREQUENCY OF NUMBER OF SIMILAR TRANSACTIONS, THE LD. CIT (APPEALS) OBSERVED THAT T HE ASSESSEE HAS ENTERED INTO NUMEROUS AND FREQUENT TRANSACTIONS ON REGULAR BASIS TO CARRY OUT HIS TRADING VENTURE IN SHARES. THE LD. CIT (APPEALS) THEREFORE, CAME TO THE CONCLUSION THAT TH E ASSESSEE WAS CARRYING ON DEALING IN SHARES IN A SYSTEMATIC AND ORGANIZED MANNER. THEREFORE, THE CONCLUSION OF THE ASSESSING OFFICER THAT INCOME FROM SALE OF SHARES CLAIMED AS INVESTMENT WA S TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. 8. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED T HAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING TECHNICAL, MARKETING AND MAIN TENANCE SERVICES FOR EARTH-MOVERS AND ALSO DEALS IN TRADING OF TIRES. SUBSTANTIAL PART OF INC OME IS GENERATED OUT OF THE ABOVE BUSINESS OF THE ASSESSEE. THE ASSESSEE HAD INVESTED SURPLUS FUNDS IN UNITS OR MUTUAL FUND AND IN SHARES THROUGH PORTFOLIO MANAGEMENT SCHEME [PMS]. THE ASSESSEE IS NOT DEALING IN SHARES AS BUSINESS INCOME. THE INVESTMENTS IN THE YEAR UNDER CONSIDERATIONS WE RE MADE AS IN THE LAST YEAR. THE TRANSACTIONS OF PURCHASE AND SALE OF EQUITY SHARES UNDER PMS WER E DELIVERY BASED. THE DELIVERY OF SCRIPS WAS TAKEN ON PURCHASE OF SHARES. SIMILARLY DELIVER Y OF SCRIPS WAS GIVEN ON SALE OF SHARES AND ARE DULY REFLECTED IN THE STATEMENT OF DEMAT ACCOUNT WI TH NATIONAL SECURITIES DEPOSITORY LTD. THE ASSESSEE HAS TREATED DELIVERY BASED TRANSACTIONS AS INVESTMENT AND, THEREFORE, PROFITS ON SALE OF SHARES WILL BE IN THE NATURE OF CAPITAL GAINS / SHO RT TERM CAPITAL GAINS DEPENDING UPON THE PERIOD OF HOLDING OF SUCH SHARES. THE LD. AR OF THE ASSES SEE PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GOPAL PUROHIT VS. JCIT [2010] 188 TAXMAN 140 (BOM). THE LD. AR OF THE ASSESSEE FURTHER SUBMITTED THAT MEREL Y BECAUSE OF VOLUME OF TRANSACTIONS IS HIGH WILL NOT DECIDE THE NATURE OF TRANSACTIONS. THE AS SESSEE HAD INVESTED IN SHARES IN SURPLUS FUND AND, THEREFORE, THE PROFIT ARISING ON SALE OF SHARE S WILL BE IN THE NATURE OF CAPITAL GAINS. ON THE OTHER HAND, THE LD. SR. DR SUBMITTED THAT THE SHARE S PURCHASED THROUGH PMS, NO DISCRETION IS LEFT WITH THE ASSESSEE. IT IS THE PMS MANAGER, WHO DECI DES AS TO WHEN THE SHARES ARE TO BE SOLD. THE PMS IS STRUCTURED IN SUCH A WAY SO THAT MAXIMUM EAR NING IS MADE. SHARES ARE NOT HELD AS INVESTMENT, BUT STOCK-IN-TRADE. THE PORTFOLIO MANA GER IS AGENT OF THE ASSESSEE. THEREFORE, THE 7 I. T. APPEAL NO. 1368 (DEL) OF 2010 SHARES HELD BY THE ASSESSEE ARE STOCK-IN-TRADE AND THE PROFIT ARISING ON SALE OF SHARES WOULD BE IN THE NATURE OF BUSINESS INCOME AND NOT AS SHORT TERM / LONG TERM CAPITAL GAINS. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE APART FROM INVESTMENT IN MUTUAL FUNDS DEPO SITED MONEY WITH THREE DIFFERENT PORTFOLIO MANAGEMENT SCHEMES. UNDER PMS AS PER SEBI THE TERM PORTFOLIO MEANS A COLLECTION OF SECURITIES OWNED BY AN INVESTOR. IT REPRESENTS THE TOTAL HOLDING OF THE SECURITIES BELONGING TO ANY PERSON. PORTFOLIO MANAGER MEANS ANY PERSON WHO P URSUANT TO A CONTRACT OR ARRANGEMENT WITH A CLIENT, ADVISES OR DIRECTS OR UNDERTAKES ON BEHALF OF THE CLIENT [WHETHER AS A DISCRETIONARY PORTFOLIO MANAGER OR OTHERWISE] THE MANAGEMENT OR A DMINISTRATION OF A PORTFOLIO SECURITIES OR THE FUNDS OF THE CLIENT AS THE CASE MAY BE. FROM THE D EFINITION OF PORTFOLIO MANAGER IT IS CLEAR THAT PORTFOLIO MANAGER ACTS LIKE AN AGENT WHO BUYS AND S ELLS SHARES ON BEHALF OF THE INDIVIDUAL. THE PORTFOLIO MANAGER DEVOTES SUFFICIENT TIME IN RESHUF FLING THE SHARES ON HAND IN LINE WITH CHANGING DYNAMICS OF THE MARKET. IT PREVENTS HOLDING OF DOR MANT OR STOCKS OF DEPRECIATING VALUE. THE PMS PROVIDES THE SKILL AND EXPERTISE TO STEER THROU GH THE COMPLEX VOLATILE AND DYNAMIC CONDITIONS OF THE MARKET. A PORTFOLIO MANAGER PROC EEDS SYSTEMATICALLY TO MANAGE ON AN ON- GOING BASIS THE COLLECTION OF SECURITIES IN HIS CUS TODY IN TUNE WITH MARKET VARIATIONS TO OPTIMIZE HIS RETURNS IN THE PROCESS. HE CARRIES OUT REGULAR FOLLOW-UP TRADING OPERATIONS, SELLING SECURITIES ON HAND AND OR BUYING NEW ITEMS OF SECURITIES BASED ON THE SENTIMENTS AND MOVEMENT OF STOCK MARKET. HE CHOOSES TO BUY SECURITIES WHEN MARKET I S BULLISH AND SELLS THOSE SECURITIES WHEN IT TURNS BULLISH. THIS ENABLES HIM TO SECURE CONSIDER ABLE PROFITS AS A RESULT OF VALUE ADDITION TO HIS HOLDING. 10. UNDER PMS A PERSON DEPOSITS THE MONEY UNDER T HE CONTRACT FOR A PERIOD NORMALLY NOT LESS ONE YEAR. AFTER DEPOSITING THE MONEY THE INVE STMENT IN SECURITIES IS LEFT TO THE CHOICE OF THE PORTFOLIO MANAGER. THE ASSESSEE HAS NO CONTROL EIT HER ON SELECTING THE SECURITIES OR THE PERIOD OF HOLDING. THE PORTFOLIO MANAGER NORMALLY 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 PORTFOLIO MANAGER ON BEHALF OF THE ASSE SSEE. THE SHARES PURCHASED AND SOLD ARE 8 I. T. APPEAL NO. 1368 (DEL) OF 2010 CREDITED AND DEBITED TO THE DEMAT ACCOUNT OF THE PA RTY, 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 A MOUNT 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 THE HIS PRIN CIPAL. SINCE THE ASSESSEE COMES TO KNOW ABOUT THE PURCHASE AND SALE OF SHARES UNDER PMS AFTER THE EXPIRY OF A PERIOD OF THREE MONTHS, THE ACCOUNTING TREATMENT IN THE BOOKS OF THE ASSESSEE I N RESPECT OF SHARES PURCHASED/SOLD BY THE PORTFOLIO MANAGER UNDER PMS CANNOT BE ENTERED IN TH E BOOKS OF THE ASSESSEE. IT IS AT THE END OF THE YEAR THE SHARES AVAILABLE IN THE DEMAT ACCOUNT CAN BE ENTERED. THEREFORE, AT THE TIME OF DEPOSIT OF AMOUNT, THE INTENTION OF THE ASSESSEE WA S TO MAXIMIZE THE PROFIT. THE PURCHASE AND SALE OF SHARES UNDER PMS WAS NOT IN THE CONTROL OF THE ASSESSEE AT ALL. THEREFORE, IT CANNOT BE SAID THAT THE ASSESSEE HAD INVESTED MONEY UNDER PMS WITH INTENTION TO 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. 11. WE MAY ALSO LIKE TO MENTION THAT THERE IS DIFFE RENCE IN INVESTMENT IN MUTUAL FUND AND PMS. IN CASE OF MUTUAL FUND THE INVESTOR IS ALLOTT ED UNITS FOR THE AMOUNT INVESTED BY HIM IN THE MUTUAL FUND. THE MUTUAL FUND MANAGER PURCHASES AND SELLS SHARES FREQUENTLY AND MAKES PROFIT/LOSS. THE PROFIT/LOSS SO EARNED/INCURRED, IN CREASES/DECREASES THE NET ASSET VALUE OF THE UNITS. THE UNITS ARE ALSO TRADABLE DEPENDING UPON THE LOCK IN PERIOD AND TERMS OF THE FUND. HOWEVER, IN THE CASE OF PMS THE AMOUNT IS INVESTED UNDER THE SC HEME. NO UNITS OR INSTRUMENTS ARE ISSUED, WHICH CAN BE TRADED. THE PORTFOLIO MANAGER UNDERTA KES TRADING IN SHARES TO MAXIMIZE THE PROFITS ON BEHALF OF THE INVESTOR. THEREFORE, THE INVESTME NT IN PMS CANNOT BE EQUATED WITH THAT OF INVESTMENT IN UNITS OF MUTUAL FUND. 9 I. T. APPEAL NO. 1368 (DEL) OF 2010 12. FURTHER, IN CASE OF AN ASSESSEE, WHO PURCHASES SHARES FROM THE MARKET AND SELLS FREQUENTLY AFTER GETTING THEM ROUTED THROUGH THE DEMAT ACCOUNT . SUCH TRANSACTIONS WILL BE IN THE NATURE OF TRADING ACTIVITY AND THE RESULTANT PROFIT WILL BE A SSESSED AS BUSINESS PROFITS. MERELY BECAUSE THE SHARES ARE CREDITED TO DEMAT ACCOUNT AT THE TIME OF PURCHASE AND DEBITED AT THE TIME OF SALE WOULD NOT MAKE THE TRANSACTIONS IN THE NATURE OF IN VESTMENT. WHAT IS IMPORTANT IS THE INTENTION AT THE TIME OF PURCHASE, FREQUENCY OF TRANSACTIONS AND VOLUME OF THE TRANSACTIONS EVEN IF HE HAS EMPLOYED HIS OWN FUNDS. 13. THE ASSESSEE HAD MADE INVESTMENT UNDER PMS. THE PROFIT HAS NOT ARISEN DIRECTLY FROM THE DEPOSITS MADE, BUT FROM THE SECURITIES PURCHASE D FROM SUCH DEPOSITS, WHICH WERE TRADED BY THE PORTFOLIO MANAGER ON BEHALF OF THE ASSESSEE. TH E QUANTITY OF SHARE TRADED IS HUGE AS IS EVIDENT FROM THE LIST APPENDED WITH THE ASSESSMENT ORDER. T HE SHARES HAVE BEEN TRADED FREQUENTLY WITH A MOTIVE TO MAXIMIZE PROFIT AND NOT WITH A VIEW TO HO LD THEM AS INVESTMENT. THE VOLUME OF THE TRANSACTION IS VERY HIGH. ALL THESE FACTS INDICATE THAT THE PORTFOLIO MANAGER HAD IN FACT DONE TRADING ON BEHALF OF THE ASSESSEE. THERE IS NO DIF FERENCE BETWEEN SIMILAR TRANSACTIONS CARRIED OUT BY AN INDIVIDUAL IN SHARES AND THE TRANSACTIONS CAR RIED OUT BY PORTFOLIO MANAGER. SUCH TRANSACTIONS CAN BE COMPARED WITH TRADING IN COMMOD ITIES OR REAL ESTATE. IF AN ASSESSEE GIVES MONEY TO A PROPERTY DEALER WITH THE INSTRUCTIONS TO PURCHASE, GET POSSESSION AND SALE AT A REASONABLE PROFIT KEEPING IN VIEW THE MARKET CONDIT IONS. THE PROPERTY DEALER ACTING AS AN AGENT ENTERS INTO SERIES OF TRANSACTIONS OF PURCHASE AND SALE EARNS PROFIT IN SOME OF THE TRANSACTIONS AND INCURS LOSS IN SOME OF THEM. THE PROPERTY DEALER AF TER CHARGING HIS COMMISSION AND EXPENSES WILL HANDOVER THE AMOUNT TOGETHER PROFIT TO THE PRI NCIPAL. CAN THE PROFIT EARNED OR LOSS INCURRED ON SUCH TRANSACTIONS BE TREATED AS CAPITAL GAIN OR LOSS. THE ANSWER IS NO. THEREFORE, IN OUR CONSIDERED OPINION, THE PROFITS ARISING ON PURCHASE AND SALE OF SHARES ARE IN THE NATURE OF BUSINESS AND NOT AS INVESTMENT. MERELY BECAUSE THE PURCHASE AND SALE OF SHARES HAD OCCURRED THROUGH DEMAT ACCOUNT ON DELIVERY BASED; IT WOULD N OT CHANGE THE NATURE OF THE TRANSACTION. SINCE THE PORTFOLIO MANAGER IN THE CAPACITY OF AN A GENT 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 AC COUNTING YEAR UNDER THE HEAD INVESTMENT 10 I. T. APPEAL NO. 1368 (DEL) OF 2010 WOULD NOT CHANGE THE CHARACTER OF TRADING DONE BY T HE 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 IT IS 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 CONSIDERE D OPINION, THE TRANSACTIONS ARE IN THE NATURE OF BUSINESS. THE DECISION RELIED UPON BY THE ASSESSEE IN THE CASE OF GOPAL PUROHIT (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 14. IT IS ALSO A SETTLED LAW THAT THE PRINCIPLE OF RES-JUDICATA IS NOT APPLICABLE TO INCOME TAX PROCEEDINGS. HENCE, THE ASSESSING OFFICER WAS NOT D EBARRED IN TAKING A DIFFERENT VIEW IF THE EARLIER VIEW WAS NOT IN ACCORDANCE WITH LAW. IT IS ALSO A SETTLED LAW THAT THE MISTAKE COMMITTED EARLIER SHOULD NOT BE PERPETUATED. HONBLE SUPREME COURT IN THE CASE OF DISTRIBUTOR (BARODA) P. LTD V UNION OF INDIA 155 ITR 120 (SC) HAS HELD MIST AKE COMMITTED EARLIER SHOULD BE RECTIFIED. IT SHOULD NOT BE PERPETUATED. HONBLE SUPREME COURT SU MMARIZED THEIR VIEWS AT PAGE 124 IN FOLLOWING WORDS:- ..TO PERPETUATE AN ERROR IS NO HEROISM. TO RECTIF Y IT IS THE COMPULSION OF THE JUDICIAL CONSCIENCE. IN THIS, WE DERIVE COMFORT AND STRENGTH FROM THE WISE AND INSPIRING WORDS OF JUSTICE BRONSON IN PIERCE V. DELAMETER (A.M.Y. AT P AGE 18): ' A JUDGE OUGHT TO BE WISE ENOUGH TO KNOW THAT HE IS FALLIBLE AND, THEREFORE, EVER READY TO LEARN: GREAT AND HONEST ENOUGH TO DISCARD ALL MERE PRIDE OF OPINION AND FO LLOW TRUTH WHEREVER IT MAY LEAD : AND COURAGEOUS ENOUGH TO ACKNOWLEDGE HIS ERRORS '. IN VIEW OF DECISION OF HONBLE SUPREME COURT WE DIS MISS THE CONTENTION OF THE ASSESSEE THAT IN ASSESSMENT YEAR 2005-06 THE SIMILAR TRANSACTIONS WE RE TREATED AS CAPITAL GAINS ON THE GROUND THAT THE VIEW TAKEN EARLIER WAS NOT IN ACCORDANCE WITH T HE LAW. PROFIT ARISING FROM A TRADING TRANSACTION CANNOT BE TREATED AS CAPITAL GAIN. ACC ORDINGLY IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT (APPEALS) HOLDING THAT THE PROFIT ARISING ON SALE/PURCHASE THROUGH PMS AS BUSINESS INCOME AND IS ACCORDINGLY UPHELD. 11 I. T. APPEAL NO. 1368 (DEL) OF 2010 15. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DIS ALLOWING THE EXEMPTION OF SECTION 10(38) ON LONG TERM CAPITAL GAINS ON SALE OF EQUITY SHARES UN DER PORTFOLIO MANAGEMENT SCHEME. SINCE WE HAVE HELD THAT THE SHARES WERE TRADED BY THE PORTFO LIO MANAGER AS AN AGENT ON BEHALF OF THE ASSESSEE AND, THEREFORE, THE PROFITS ARISING ARE IN THE NATURE OF BUSINESS PROFITS. THEREFORE, PROVISIONS OF SECTION 10(38) OF THE ACT WILL NOT AP PLY IN CASE OF PROFITS ARISING ON TRADING ACTIVITY THOUGH THE SHARES WERE HELD BY THE ASSESSEE FOR MOR E THAN A PERIOD OF 12 MONTHS. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD . CIT (APPEALS) CONFIRMING THE DISALLOWANCE UNDER SECTION 10(38) OF THE ACT. 16. THE NEXT ISSUE FOR CONSIDERATION RELATES TO REJ ECTING THE CONCESSION RATE OF 10 PER CENT UNDER SECTION 111-A ON SHORT TERM CAPITAL GAINS ON SALE OF EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME. SINCE WE HAVE HELD THE PROFITS ON PURCHASE AND SALE OF SHARES AS BUSINESS INCOME, PROVISIONS OF SECTION 111-A OF THE ACT ARE NOT APPLICABLE. WE, THEREFORE, UPHOLD THE ORDER OF THE LD. CIT (APPEALS). 17. THE LAST ISSUE FOR CONSIDERATION RELATES TO CHA RGING OF INTEREST UNDER SECTION 234-B AND 234-D OF THE ACT. CHARGING OF INTEREST UNDER SECTIONS 234-B AND 234-D IS MANDATORY AND CONSEQUENTIAL TO THE ADDITIONS MADE. WE, THEREFORE , DIRECT THE ASSESSING OFFICER TO CHARGE INTEREST, IF ANY, AFTER GIVING EFFECT TO THIS ORDER . 18. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 16 TH DECEMBER, 2011. SD/- SD/- [ RAJPAL YADAV ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 16 TH DECEMBER, 2011. *MEHTA * 12 I. T. APPEAL NO. 1368 (DEL) OF 2010 COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT.