DCIT, Pune V. Smt Sadhana A Patni, Pune

ITA 1725/PUN/2012

• Counselvise Citation: 172524514 RSA 2012
• Duration Of Justice: 1 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 23-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S KOTHARI
• Keywords: Business income
• Section: 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S.PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1725/PN/2012 (ASSESSMENT YEAR 2005-06) DY.CIT, CIRCLE-2, PUNE .. APPELLANT VS. SMT. SADHANA A. PATNI, S.NO.1-A, IRANI MARKET COMPOUND, YERAWADA, PUNE 411001. .. RESPONDENT PAN NO.AGUPP2868H APPELLANT BY : SHRI D.S. KOTHARI RESPONDENT BY : SHRI C.H. NANIWADEKAR DATE OF HEARING : 08-10-2013 DATE OF PRONOUNCEMENT : 10-10-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 23-04-2012 OF THE CIT(A)-II, PUNE RELATING TO ASSES SMENT YEAR 2005-06. 2. IN GROUNDS OF APPEAL NO. 1 TO 9 THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN HOLDING THAT THE ACTIVITY OF TRANS ACTING IN SHARES/MUTUAL FUNDS BY ENGAGING PORTFOLIO MANAGEMENT SERVICES (IN SHORT PMS) WAS AN INVESTMENT ACTIVITY SO AS TO ASSESS THE RESULTANT G AINS UNDER THE HEAD CAPITAL GAINS AND NOT AS BUSINESS INCOME AS CON TENDED BY THE ASSESSING OFFICER. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND MU TUAL FUNDS AND HAS ALSO DERIVED INCOME FROM HOUSE PROPERTY, CAPITAL GAIN AN D INCOME FROM OTHER SOURCES. THE RETURN DECLARING INCOME AT RS.1,03,37 ,620/- WAS FILED ON 27- 10-2005 WHICH WAS ACCEPTED BY THE ASSESSING OFFICER IN THE ORDER PASSED 2 U/S.143(3) DATED 11-04-2007. SUBSEQUENTLY, THE LD. CIT INVOKING THE POWERS U/S.263 REMITTED THE ISSUE TO THE FILE OF TH E ASSESSING OFFICER FOR DECIDING THE ISSUE AFRESH. 4. THE ASSESSEE CHALLENGED THE VALIDITY OF 263 PROC EEDINGS BEFORE THE TRIBUNAL BUT WAS UNSUCCESSFUL. SUBSEQUENTLY, THE A SSESSING OFFICER IN THE ORDER PASSED U/S.143(3) R.W.S.263 DETERMINED THE TO TAL INCOME AT RS.1,03,71,430/-. HOWEVER, IN THE SAID ORDER, THE ASSESSING OFFICER FOLLOWING THE ORDERS FOR A.Y. 2006-07 & 2007-08 TRE ATED THE CAPITAL GAIN ON INVESTMENT THROUGH PMS AS BUSINESS INCOME. IN APPEAL THE LD.CIT(A) FOLLOWING THE ORDER OF HIS PREDECESSOR FOR A.YRS. 2 007-08 AND 2008-09 DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLD ING THAT THE ACTIVITY OF TRANSACTION IN SHARES/MUTUAL FUNDS BY ENGAGING PMS WAS AN INVESTMENT ACTIVITY AND THE RESULTANT GAINS WAS ASSESSABLE UND ER THE HEAD CAPITAL GAINS. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) TH E REVENUE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET F ILED THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2008-09 VI DE ITA NO.1535/PN/2011 ORDER DATED 27-09-2012 AND OTHER CO NNECTED APPEALS AND SUBMITTED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICER. 7. AFTER HEARING BOTH THE SIDES WE FIND IDENTICAL I SSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF APOORVA A. PATNI FOR A.Y. 2007-08. WE FIND THE TRIBUNAL FOLLOWING THE ORDER OF THE TRIBUN AL IN THE GROUP CASES FOR 3 A.Y. 2006-07 ALLOWED THE CLAIM OF SHORT TERM CAPITA L GAIN AND LONG TERM CAPITAL GAIN FROM GAINS IN RESPECT OF INVESTMENT TH ROUGH PMS SERVICES AS AGAINST BUSINESS INCOME TREATED BY THE ASSESSING OFFICER BY HOLDING AS UNDER : 6. AFTER HEARING BOTH THE SIDES, WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF APOORVA A. PATNI FOR TH E A.Y. 2007-08. WE FIND THE TRIBUNAL, FOLLOWING THE ORDER OF THE TRIBUNAL IN TH E GROUP CASES FOR A.Y. 2006-07, ALLOWED THE CLAIM OF SHORT TERM CAPITAL GAIN AND LO NG TERM CAPITAL GAIN FROM GAINS IN RESPECT OF INVESTMENT THROUGH PMS SERVICE AS AGAINST BUSINESS INCOME TREATED BY THE AO BY HOLDING AS UNDER : 3. AFTER HEARING BOTH THE SIDES, WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE I MMEDIATE PRECEEDING ASSESSMENT YEAR. WE FIND THE TRIBUNAL IN THE CONSO LIDATED ORDER VIDE ITA NO. 239/PN/2011 AND OTHER CONNECTED APPEALS VIDE OR DER DATED 21-06- 2012 FOR ASSESSMENT YEAR 2006-07 HAS DECIDED THE IS SUE AND ALLOWED THE CLAIM OF THE ASSESSEE. THE RELEVANT OBSERVATIONS O F THE TRIBUNAL FROM PARA 9 TO 15 OF THE ORDER ARE AS UNDER : 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. OSTENSIBLY, IN THE PRESENT CASE, THE TRANSACTIONS IN FOCUS ARE THE TRANSACTIONS IN SHARES AND SECURITIES CARRIED OUT BY THE ASSESSEE THROUGH THE PMS PROVIDER. FURTHER, AS IT EMERGES FROM THE RECORD THAT IN THE PRESENT CASE, THE PORTFOLIO MANAGEMENT SERVICES ENGAGED BY THE ASSESS EE WERE IN THE NATURE OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVIC ES. THE FEATURES OF SUCH A SCHEME HAVE BEEN ADEQUATELY ELABORATED BY TH E COMMISSIONER OF INCOME-TAX (APPEALS) IN THE IMPUGNED ORDER AND IS A LSO BORNE OUT OF THE COPIES OF A FEW AGREEMENTS WITH THE PMS PROVIDER, W HICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 137 TO 183. THE C OMMISSIONER OF INCOME-TAX (APPEALS) HAS BROUGHT OUT THE FEATURES O F THE DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES AGREEMENT WHEREIN THE PMS PROVIDER HAS GOT ABSOLUTE INDEPENDENCE IN TAKING DAY-TO-DAY DECISIONS SO FAR AS INVESTMENTS IN SHARES ETC. ARE CONCERNED. THE PMS P ROVIDER RECEIVES A LUMP-SUM AMOUNT FROM THE CLIENT AND IN A DISCRETION ARY PORTFOLIO MANAGEMENT SERVICE ARRANGEMENT, AND THE PMS PROVIDE R MAKES THE INVESTMENTS AS PER HIS OWN JUDGMENT REACHED ON THE BASIS OF HIS OWN PROFESSIONAL EXPERTISE AND ACCORDINGLY UNDERTAKES D AY-TO-DAY DECISIONS FOR PURCHASE AND SALE OF A PARTICULAR SCRIP WITHOUT RECOURSE TO THE CLIENT. IT IS ALSO EVIDENT THAT SUCH DECISIONS TAKEN BY THE PMS PROVIDER ARE NOT CLIENT-SPECIFIC, BUT IS TAKEN FOR A WHOLE RANGE OF CLIENTS IN HIS PORTFOLIO. NO DOUBT, THE PMS PROVIDER UNDERTAKES THESE TRANSAC TIONS IN THE NAME OF THE ASSESSEE AND THE SHARES ARE ALSO KEPT IN DEM ATERIALIZED FORM IN THE DEMAT ACCOUNT OF THE ASSESSEE. SO, HOWEVER, ALL SUCH ACTIVITIES ARE CARRIED OUT IN A FIDUCIARY CAPACITY. HAVING REGARD TO THE OPERATING MECHANICS OF A DISCRETIONARY PORTFOLIO MANAGEMENT A GREEMENT, WHICH IS IN QUESTION BEFORE US, THE RELATIONSHIP BETWEEN THE PMS PROVIDER AND THE ASSESSEE CANNOT BE CONTEMPLATED AS THAT OF A MERE A GENT AS UNDERSTOOD IN THE COMMON PARLANCE. ALL DECISIONS REGARDING INV ESTMENTS, ITS TIMINGS ETC, ARE MADE BY THE PMS PROVIDER AND NOT BY THE IN VESTOR PER SE, THOUGH THE RESULTANT GAIN/LOSS IS ON ACCOUNT OF THE ASSESSEE INVESTOR. IN THE PRESENT CASE, WE MAY ALSO NOTICE THAT AT THE TI ME OF ENGAGING THE PMS PROVIDER, THE ASSESSEE MANDATED HIS INVESTMENT OBJECTIVE WHICH CLEARLY INDICATES THE INTENTION OF THE ASSESSEE BEH IND THE PARKING OF FUNDS WITH THE PMS PROVIDER. THE INVESTMENT OBJECTI VE MANDATED BY THE 4 ASSESSEE AND WHICH FORMS PART OF THE AGREEMENT WITH THE PMS PROVIDER HAS BEEN PLACED IN THE PAPER BOOK AT PAGE 159 IN TH E CASE OF AGREEMENT WITH DSP MERRILL LYNCH FUND MANAGERS LTD. WE ARE T EMPTED TO REPRODUCE THE SAME, WHICH IS AS UNDER, THE OBJECTIVE IS TO ACHIEVE REASONABLE RETURNS OVE R THE LONG TERM BY INVESTING IN A FOCUSED PORTFOLIO OF 15-20 STOCKS WI TH GOOD GROWTH PROSPECTS, ACROSS VARIOUS SECTORS. WE DO NOT WANT E XPOSURE TO ANY COMPANY IN THE INFORMATION TECHNOLOGY SECTOR AND SP ECIFICALLY TO PATNI COMPUTER SYSTEMS LIMITED AND PCS INDUSTRIES LIMITED . FOR THE REASON THAT THE SAME GIVES AWAY THE DOMINANT INTENTION OF THE ASSESSEE OF MAKING INVESTMENTS WITH A VIEW OF GROWTH PROSPECTS . CLEARLY, IT ENVISAGES THAT WHAT THE ASSESSEE WAS LOOKING FOR BY ENGAGING THE SERVICES OF AN EXPERT, NAMELY, THE PMS PROVIDER, WA S APPRECIATION AND MAXIMIZATION OF WEALTH AND NOT MERELY ENCASHING OF PROFITS WITH A VIEW OF A TRADER. IN THE CASE SPECIFIC BEFORE US, WE FIN D THAT IN THIS FACTUAL BACKGROUND, THE PLEA OF THE REVENUE THAT THE ARRANG EMENT OF APPOINTING A PMS PROVIDER TO MANAGE THE INVESTMENTS WAS WITH AN INTENTION OF A TRADE, CANNOT BE ACCEPTED. 10. IN ANY CASE, IN SO FAR AS THE VERY NATURE OF DI SCRETIONARY PORTFOLIO MANAGEMENT SCHEME IS CONCERNED, THE SAME HAS ALREAD Y BEEN CONSIDERED BY OUR CO-ORDINATE BENCH IN THE CASE OF ARA TRADING AND INVESTMENT P. LTD. AND KRA HOLDING AND TRADING P. L TD (SUPRA). ACCORDING TO THE TRIBUNAL, THE SCHEME IS FOR AN ACTIVITY OF W EALTH MAXIMIZATION RATHER THAN A PROFIT MAXIMIZATION AND ACCORDINGLY, IT HAS BEEN HELD THAT GAIN FROM SUCH ACTIVITY WAS LIABLE TO BE CONSIDERED AS DERIVED FROM AN ACTIVITY OF INVESTMENTS AND NOT TRADING. THEREFORE, ON THIS ASPECT OF THE CONTROVERSY, WE FIND THAT THE COMMISSIONER OF INCOM E-TAX (APPEALS) MADE NO MISTAKE IN FOLLOWING THE ORDER OF THE TRIBU NAL IN THE CASE OF ARA TRADING AND INVESTMENT P. LTD. AND KRA HOLDING AND TRADING P. LTD (SUPRA) AND IN HOLDING THAT THE ASSESSEE WAS INDEED ENGAGED IN AN INVESTMENT ACTIVITY WHILE APPOINTING THE PMS PROVID ER WITH REGARD TO THE STATED TRANSACTIONS. 11. IN SO FAR AS OTHER OBJECTIONS OF THE ASSESSING OFFICER THAT THERE WAS VOLUME AND FREQUENCY OF TRANSACTIONS WAS LARGE SO AS TO CONSTITUTE BUSINESS ACTIVITY, WE FIND THAT THE FACTUAL MATRIX HAS BEEN APPROPRIATELY ANALYZED BY THE COMMISSIONER OF INCOME-TAX (APPEALS ) IN PARA 4.20 OF THE IMPUGNED ORDER, WHICH IS AS UNDER: SO FAR AS VOLUME AND FREQUENCY OF TRANSACTIONS ARE CONCERNED, IT HAS BEEN EXPLAINED THAT ACTUALLY THE NUMBER OF SCRIP TR ADED WAS NOT VERY LARGE BEING 62 ACROSS ALL THE 3 PMSS, ENGAGED DURIN G THE YEAR, WHICH WAS NOT MUCH CONSIDERING THAT ABOUT 2000 COMPANIES SHARES WERE ACTIVELY TRADED IN THE STOCK EXCHANGES. IT WAS ALSO CLARIFIED THAT THE FREQUENCIES OF TRANSACTIONS WAS NOT MUCH. SOMETIMES SEVERAL TRANSACTIONS MAY HAVE TO BE MADE IN THE SAME SCRIP, WHICH INCREASES THE FREQUENCY. IT WAS EMPHASISED THAT THE TOTAL SALES T URNOVER IN THE INVESTMENTS MADE THROUGH PMS DURING THE YEAR WAS 19 .06 CRORES INVOLVING 62 SCRIPS, WHEREAS, IN THE SHARE TRADING BUSINESS SEPARATELY SHOWN BY THE APPELLANT, THE SALES TURNOVER WAS 73.2 1 CRORES INVOLVING 76 SCRIPS. THIS SHOWS THAT IN THE SHARE TRADING BUSIN ESS ACTIVITY, THE TURNOVER WAS ALMOST 4 TIMES HIGHER EVEN THOUGH THE NUMBER OF SCRIPS WERE ONLY MARGINALLY HIGH. IT WAS EMPHASIZED THAT IN THE TRADING ACTIVITY EVEN THOUGH THE SHARES INVOLVED WERE PROPORTIONATEL Y MUCH LESS AS COMPARED TO THE TURNOVER, SINCE THE INTENTION WAS T O CARRY ON BUSINESS ACTIVITY, THE SAME WAS SHOWN UNDER THE HEAD BUSINES S INCOME. IT ALSO 5 INCLUDED SPECULATIVE TRANSACTION AND DAY TRADING, W HEREAS NO SUCH TRANSACTIONS WERE ENTERED INTO BY THE PMS. THE APPE LLANT HAS ALSO EMPHASIZED THAT I WAS PRUDENT INVESTMENT ACTIVITY O F THE PMS TO BUY A TARGET QUANTITY OF A PARTICULAR SCRIP IN SMALL LOTS FOR AVERAGING PURPOSE; AND IT SHOULD NOT BE TREATED AS FREQUENT AND REPETI TIVE TRANSACTIONS. THE APPELLANT THEN GOES ON TO CITE THE DECISION OF THE ITAT, MUMBAI BENCH IN THE CASE OF JANAK S. RANGWALA, 11 SOT 627 IN WHICH IT WAS OBSERVED THAT MERE VOLUME AND MAGNITUDE OF TRANSACTION WILL NOT A LTER THE NATURE OF TRANSACTION IF THE INTENTION WAS TO HOLD THE SHARES AS INVESTMENT AND NOT AS STOCK IN TRADE. SIMILAR EXPLANATION HAS BEEN GIV EN ONCE AGAIN BY THE LETTER DT 14.6.2010 BY THE APPELLANT IN RESPONSE TO THE AOS REPORT. WE HAVE EXAMINED THE POSITION, IN PARTICULAR THE AN ALYSIS MADE OUT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN THE EXT RACTED PORTION WITH REFERENCE TO THE STATEMENT AND TRANSACTIONS WHICH H AVE BEEN PLACED N THE PAPER BOOK FILED BEFORE US. IN OUR CONSIDERED O PINION, THE INFERENCE DRAWN OUT BY THE COMMISSIONER OF INCOME-TAX (APPEAL S) CLEARLY ESTABLISHES THAT THE VOLUME AND FREQUENCY OF TRANSA CTIONS SOUGHT TO BE MADE OUT BY THE ASSESSING OFFICER WITH REGARD TO TH E IMPUGNED ACTIVITY STANDS ON AN ENTIRELY DIFFERENT FOOTING AND IS QUIT E DISTINCT FROM THE ACTIVITY OF TRADING IN SHARES CARRIED OUT BY THE AS SESSEE. IN FACT, IT IS NOTABLE THAT IN THE SHARE TRADING BUSINESS CARRIED ON BY THE ASSESSEE, HE HAS CARRIED OUT CERTAIN SPECULATIVE AND TRADING ACT IVITIES AND THAT IN THE CASE OF A PMS PROVIDER, SUCH ACTIVITIES ARE PROHIBI TED IN LAW. HAVING REGARD TO THE AFORESAID DISCUSSION BY THE COMMISSIO NER OF INCOME-TAX (APPEALS), WHICH IS BORNE OUT OF THE RECORD, WE, TH EREFORE, FIND NO REASONS TO UPHOLD THE PLEA OF THE ASSESSING OFFICER ON THE BASIS OF THE VOLUME AND FREQUENCY OF TRANSACTIONS. 12. THE ASSESSING OFFICER HAS ALSO POINTED OUT THAT EARNING OF DIVIDENDS WAS NOT AT ALL THE MOTIVE OF SUCH TRANSAC TIONS, BECAUSE THE SHARES HAVE BEEN SOLD JUST BEFORE THE SAME BECAME E X-DIVIDEND ON THE STOCK EXCHANGES. IN THIS REGARD, WE FIND THAT THE C OMMISSIONER OF INCOME-TAX (APPEALS) HAS FACTUALLY FOUND THE SAME T O BE CONTRARY TO MATERIAL ON RECORD AS PER THE DISCUSSION IN PARA 4. 15 OF THE ORDER, WHICH IS AS UNDER: 4.15 FOR THE PROPOSITION THAT EARNING OF DIVIDEND WAS NOT THE MOTIVE, THE AO HAS CITED INSTANCES WHEN THE APPELLANT HAS S OLD SOME SHARES JUST BEFORE THE DATES OF THE SHARES BECOMING EX-DIVIDEND OR THE STOCK EXCHANGES. HOWEVER, A PERUSAL OF THE CHART GIVEN IN THE ASSESSMENT ORDER SHOWED THAT THE INFORMATION REGARDING DATE OF DECLARATION OF DIVIDEND HAS NOT BEEN GIVEN. FOR EXAMPLE, IN THE CA SE OF SCRIP OF AMTEK AUTO, THE SALE WAS MADE ON 19.9.2005 WHEREAS THE EX -DIVIDEND DATE WAS 22.12.2005; I.E. THE SALE WAS MADE MORE THAN 3 MONT HS BEFORE THE SHARES BECAME EX-DIVIDEND. IT DOES NOT NECESSARILY FOLLOW THAT THE DIVIDEND WAS ALREADY DECLARED IN THIS CASE AND STIL L THE APPELLANT SOLD THE SAME BEFORE THE SHARES BECOMING EX-DIVIDEND. SIMILA RLY, IN THE CASE OF ACC, TWO PARTICULAR SALE DATES MENTIONED WHEN THE S CRIP WAS TRANSACTED BY DSPML, WERE 24.3.2005 AND 16.11.05, WHEREAS THE EX-DIVIDEND DATE HAS BEEN MENTIONED AS 29.3.2006. IT CANNOT THEREFOR E BE SAID THAT THE APPELLANT HAD KNOWINGLY SOLD THE SHARES AFTER DECLA RATION OF THE DIVIDEND BEFORE IT BECAME EX-DIVIDEND. AGAIN IN RESPECT OF S HARES OF JET AIRWAYS, THE EX-DIVIDEND DATE HAS BEEN MENTIONED AS 14.9.200 5 BY THE AO, AND THE DATE OF SALE HAS BEEN MENTIONED AS 17.10.2005 A ND 23.1.2006 IN THE CASE OF TWO DIFFERENT PMSS. THIS INSTANCE POINTS O UT TO A WRONG CONCLUSION BY THE AO AS HERE THE SHARES HAVE BEEN S OLD AFTER THOSE HAVE BECOME EX-DIVIDEND. COMING TO TWO MORE INSTANCES PO INTED OUT BY THE 6 AO IN THIS CHART, SHARES OF NALCO HAVE BEEN SOLD ON 30.3.2006 WHICH WAS AFTER THE EX-DIVIDEND DATE OF 23.9.2005; AND THE SA LE OF ONGC SHARES BY DSPML WAS MADE ON 30.12.2005, WHICH ALSO IS AFTER T HE EX-DIVIDEND DATE OF 1.9.2005. IT IS, THEREFORE, CLEAR THAT THE INSTA NCES POINTED OUT BY THE AO DID NOT SUPPORT THIS ARGUMENT, EXCEPT IN THE CAS E OF TWO OR THREE INSTANCES, WHERE THE SALE HAS BEEN MADE JUST BEFORE THE SHARES BECOMING EX-DIVIDEND; AND THERE WAS A POSSIBILITY T HAT THE DIVIDEND WOULD HAVE BEEN DECLARED AND KNOWN TO THE PMS. HOWE VER, SUCH INSTANCES ARE FEW AND FAR BETWEEN; AND IT CANNOT LE AD TO A CONCLUSION OF INDULGING IN A BUSINESS ACTIVITY. MOREOVER, AS HAS BEEN EXPLAINED ELSEWHERE BY THE APPELLANT, SUCH DAY TO DAY DECISIO NS REGARDING PURCHASE AND SALE OF PARTICULAR SCRIPS ARE NOT THAT OF THE APPELLANT, BUT OF THE PORTFOLIO MANAGER SINCE THE APPELLANTS CASE WAS THAT OF ENGAGEMENT OF DISCRETIONARY PORTFOLIO MANAGEMENT SE RVICES. IT WAS EXPLAINED THAT AS PER SEBI REGULATIONS, THERE WERE TWO TYPES OF PMSS I.E. DISCRETIONARY AND NON-DISCRETIONARY. IT WAS EXPLAI NED THAT IN CASE OF DISCRETIONARY PMS AS AVAILED BY THE APPELLANT, HE A PPELLANT DID NOT HAVE CONTROL ON THE DAY TO DAY ACTIVITIES AND DID NOT GI VE ANY DIRECTIONS, EXCEPT FOR THE BROAD GUIDELINE FOR NOT PURCHASING T HE SHARES OF PATNI COMPUTERS SYSTEMS LTD. SINCE IT WAS PROMOTED BY THE APPELLANT AND HIS FAMILY MEMBERS. IT WAS ALSO EXPLAINED DURING THE AP PELLATE PROCEEDINGS THAT IN ACCORDANCE WITH THE ACCOUNTING STANDARD AND CBDT CIRCULAR, DIVIDEND EARNING WAS NOT THE ONLY CRITERION AND IN ANY CASE SUBSTANTIAL AMOUNT OF DIVIDEND OF RS 16,31,796/- WAS ALSO EARNE D DURING THE YEAR IN THE INVESTMENTS THROUGH THE PMS. THUS, THIS POINT I S ADEQUATELY EXPLAINED. ON THIS ASPECT ALSO, WE FIND NO MATERIAL TO DIFFER WITH THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), WHICH WE HERE BY AFFIRM. 13. ANOTHER ASPECT MADE OUT BY THE ASSESSING OFFICE R WAS TO THE EFFECT THAT BY ITS VERY NATURE, SALES AND PURCHASES CARRIED OUT BY THE PMS PROVIDER WAS OF SHORT-TERM NATURE AND, THEREFORE, I T WAS TO BE REGARDED AS A BUSINESS ACTIVITY. FACTUALLY SPEAKING, ON THIS ASPECT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS DEALT WITH THE SAME IN PARA 4.17 OF HIS ORDER, WHICH IS AS UNDER: 4.17 THE AO ALSO POINTED OUT TO SOME INSTANCES WHE N SHARES OF THE SAME COMPANY HAVE BEEN REPURCHASED SOMETIMES AFTER THE SALE. IN THIS CONNECTION, IT IS EXPLAINED THAT SUCH INSTANCES WER E NOT MUCH AND THERE WERE REASONS FOR CHURNING OF THE INVESTMENTS BY TH E PORTFOLIO MANAGER AT DIFFERENT INSTANCES DURING THE YEAR. IT IS RELEV ANT TO NOTICE THAT THE APPELLANT ALSO POINTED OUT THAT THRE WERE MANY SHAR ES HELD FOR A LONG TIME, EVEN UPTO 18 MONTHS, BY THE PMS, AND SUBSTANT IAL AMOUNT OF LONG TERM CAPITAL GAIN OF RS 83,09,187/- WAS ALSO SHOWN. IN FACT, THE AO HAS TREATED EVEN THIS LTCG OF RS 83,09,187/- AS BUSINES S INCOME, WHICH CANNOT BE JUSTIFIED. ON THE OTHER HAND, DEPENDING O N THE MARKET CONDITIONS, VIS-A-VIS THE ANALYSIS OF THE FUNDAMENT ALS OF PARTICULAR SCRIP, DECISION MAY HAVE TO BE TAKEN TO EXIT AT A PARTICUL AR POINT OF TIME, AND TO RE-ENTER AFTER A FEW MONTHS ON CHANGE OF FUNDAMENTA LS. THIS DOES NOT MEAN THAT IT WAS IN THE NATURE OF REPEATED TRADING ACTIVITIES IN THE SAME COMMODITY; IN WHICH CASE THERE COULD BE MULTIPLE RE PETITIONS WITHIN A FEW DAYS; OR EVEN DURING THE SAME DAY. 14. IN THIS CONTEXT, WE FIND THAT THE ASSESSING OFF ICER HAS TREATED EVEN THE GAIN ON INVESTMENTS HELD FOR MORE THAN 12 MONTHS ALSO AS BUSINESS INCOME. QUITE CLEARLY AS PER THE STATEMENT IN RESPECT OF GAINS AND INVESTMENT IN SHARES THROUGH PMS PROVIDER PLACE D AT PAGE 73 OF THE 7 PAPER BOOK, THE HOLDING PERIOD GOES UPTO EVEN 18 MO NTHS BEFORE THE INVESTMENT WAS LIQUIDATED. BE THAT AS IT MAY, THE F ACTOR OF PERIOD OF HOLDING CANNOT BE ASCRIBED TO THE ASSESSEE, INASMUC H AS IT HAS NO CONTROL ON SUCH DECISION MAKING IN A DISCRETIONARY PMS ARRA NGEMENT, BECAUSE SUCH DECISIONS ARE TAKEN BY THE PMS PROVIDER AS WE HAVE OBSERVED EARLIER. IN ANY CASE, IN SO FAR AS THE PRESENT CASE IS CONCERNED, THE INVESTMENT OBJECTIVE OF THE ASSESSEE MANDATED TO TH E PMS PROVIDER WAS TO ACHIEVE GROWTH PROSPECTS AND THE ACTUALITY OF TR ANSACTIONS CARRIED OUT BY THE PMS PROVIDER IN ORDER TO ACHIEVE THE STATED INVESTMENT OBJECTIVE OF THE ASSESSEE CANNOT BE MADE A BASIS TO CHARGE TH E ASSESSEE OF HAVING A DIFFERENT OBJECTIVE. CONSIDERING THE AFORESAID MA TTERS, WE, THEREFORE, ARE OF THE VIEW THAT THE OBJECTIONS MADE OUT BY THE ASSESSING OFFICER HAVE BEEN ADEQUATELY ADDRESSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN COMING TO HIS FINDINGS THAT THE INVEST MENTS CARRIED OUT BY THE ASSESSEE THROUGH THE PMS PROVIDER DO NOT RESULT IN A GAIN ASSESSABLE AS BUSINESS INCOME. 15. IN VIEW OF THE AFORESAID DISCUSSION, AND HAVING REGARD TO THE REASONINGS EXTENDED BY THE COMMISSIONER OF INCOME-T AX (APPEALS) WITH WHICH WE HEREBY AFFIRM, WE FIND THAT THE GRIEVANCE OF THE REVENUE IN THIS APPEAL IS MISDIRECTED AND ACCORDINGLY THE CONCLUSIO N ARRIVED AT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ASPECT IS HEREBY AFFIRMED. THUS, ON THIS GROUND, REVENUE FAILS. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE REVENUE THE GROUNDS RAISED BY THE REVENUE ON THIS I SSUE ARE DISMISSED. 7. ACCORDINGLY THE REVENUE APPEAL WAS DISMISSED. S INCE NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE AGAINST THE ORDER OF THE TRIBUNAL IN THE CONNECTED CASES, THEREFORE, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE GROUP CASES WE UPHOLD THE ORDER OF THE CIT(A). CONSEQUEN TLY THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 7.1 WE FIND SIMILAR VIEW HAS BEEN TAKEN BY THE TRIB UNAL IN THE CASE OF DCIT VS. RUCHI A. PATNI IN A.Y. 2005-06 VIDE ITA NO .310/PN/2012 ORDER DATED 30-04-2013. RESPECTFULLY FOLLOWING THE DECIS IONS OF THE TRIBUNAL IN GROUP CASES AS WELL AS IN THE CASE OF THE ASSESSEE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 8. GROUND OF APPEAL NO.10 BY THE REVENUE READS AS U NDER : THE CIT(A) GROSSLY ERRED IN DELETING THE DISALLOWA NCE U/S.14A OF RS.8,359/- INSTEAD OF CONFIRMING RS.42,175/- DISALL OWED BY THE AO' 8 8.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DISALLOWED AN AMOUNT OF RS.42,175/- U/S.14A BEING 0.5% OF THE AVERAGE INVESTMENT OF THE FUNDS DEPLOYED AS EXPENDITURE INCURRED FOR EARN ING TAX FREE DIVIDEND INCOME. IN APPEAL THE LD.CIT(A) RESTRICTED SUCH DI SALLOWANCE TO RS.8,359/- ON THE GROUND THAT RULE 8D IS NOT APPLICABLE FOR TH E IMPUGNED ASSESSMENT YEAR AND ONLY SOME REASONABLE DISALLOWANCE HAS TO B E MADE. HE OBSERVED THAT RULE 8D IS NOT APPLICABLE FOR A.Y. 2005-06 AND THE ASSESSING OFFICER HAD APPLIED THE SAID RULE TO ARRIVE AT THE DISALLOW ANCE OF RS.42,175/- WHICH INCLUDED RS.8,359/- ON ACCOUNT OF PMS AND RS.33,816 /- ON ACCOUNT OF INVESTMENT IN SHARES IN RESPECT OF THE PROPRIETARY CONCERN. SINCE THE EXPENDITURE ON PMS HAS NOT BEEN CLAIMED BY THE ASSE SSEE, HE HELD THAT THERE DOES NOT REMAIN ANY OTHER EXPENDITURE OTHER T HAN THIS EXPENDITURE OF RS.8,359/- WHICH IS OTHERWISE LIABLE TO BE DISALLOW ED U/S.14A OF THE ACT. HE ACCORDINGLY SUSTAINED AN AMOUNT OF RS.8,359/- AN D DELETED THE BALANCE AMOUNT. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) TH E REVENUE IS IN APPEAL BEFORE US. 8.2 AFTER HEARING BOTH THE SIDES, WE FIND NO INFIRM ITY IN THE ORDER OF THE CIT(A). THE LD.CIT(A) HAS GIVEN A CATEGORICAL FIND ING THAT EXPENDITURE ON PMS HAS NOT BEEN CLAIMED BY THE ASSESSEE AND THEREF ORE THERE DOES NOT REMAIN ANY OTHER EXPENDITURE OTHER THAN THE EXPENDI TURE OF RS.8,359/- WHICH IS LIABLE TO BE DISALLOWED U/S.14A. THEREFOR E, NO DISALLOWANCE U/S.14A R.W. RULE 8D CAN BE MADE OVER AND ABOVE RS. 8,359/-. THE ABOVE FACTUAL FINDING GIVEN BY THE LD.CIT(A) COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. UNDER THESE CIRCU MSTANCES, WE HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE DISALL OWANCE OF RS.33,816/- 9 MADE BY THE ASSESSING OFFICER. GROUND RAISED BY TH E REVENUE IS ACCORDINGLY DISMISSED. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 10 TH DAY OF OCTOBER, 2013. SD/- SD/- (R.S. PADVEKAR) (R.K. PAND A) JUDICIAL MEMBER ACCOU NTANT MEMBER PUNE DATED: 10 TH OCTOBER 2013 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-II, PUNE 4 CIT-II, PUNE 5. THE D.R, B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE