SALIL SHAH FAMILY PVT. TRUST (REPRESENTED BY ILF&S TRUST CO. LTD.), MUMBAI V. A.C.I.T. RG.19(3), MUMBAI

ITA 2446/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1890 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 12-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Revised return

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E B ENCH, MUMBAI . . , !'# , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI N.K. BILLA IYA, AM ./I.T.A. NO. 2446/MUM/2012 ( & & & & / ASSESSMENT YEAR : 2008-09 SALIL SHAH FAMILY PVT. TRUST, (REPRESENTED BY ILF&S TRUST CO. LTD), THE IL&FS FINANCIAL CENTRE, 10 TH FLOOR, PLOT C-22, G-BLOCK, BANDRA KURLA COMPLEX, BANDRA (E),MUMBAI-400 051 / VS. THE ACIT, RANGE-19(3), MUMBAI ' $ ./ () ./PAN/GIR NO. AAFTS 9295Q ( '* /APPELLANT ) .. ( +,'* / RESPONDENT ) '* - / APPELLANT BY: SHRI MAYUR KISNADWALA +,'* . - / RESPONDENT BY SHRI CHATURBHUJ DAS . /0$ / DATE OF HEARING : 28.01.2013 12& . /0$ /DATE OF PRONOUNCEMENT :01.02.2013 3 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. CIT(A)-30, MUMBAI DT.19.1.2012 PERTAINING TO A.Y. 2 008-09. 2. THE SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE L D. CIT(A) ERRED IN HOLDING THAT THE SHORT TERM CAPITAL GAINS (STCG) OF RS. 5,97,26,574/- AND LONG TERM CAPITAL GAIN (LTCG) OF RS. 8,91,000/- ON SALE OF THE ITA NO. 2446/MUM/2012 2 INVESTMENTS THROUGH A PORTFOLIO MANAGER, IS BUSINE SS INCOME AND NOT CAPITAL GAINS. 3. THE ASSESSEE IS A PRIVATE FAMILY TRUST. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS SHOWN LTCG AT RS. 8 ,91,000/- AND STCG AT RS. 5,97,26,574 AND INCOME FROM OTHER SOURCES AT RS. 180/-. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND ENORMOUS VOLUME, PERIODICITY, FREQUENCY AND M ULTIPLICITY OF TRANSACTIONS OF PURCHASE AND SALE IN SHARES AND SEC URITIES. ACCORDING TO THE AO , IT CANNOT BE SAID THAT THE SHARES/SECURITI ES HAVE BEEN HELD AS ASSETS. PROCEEDING FURTHER, THE AO QUESTIONED THE L TCG AND THE STCG SHOWN BY THE ASSESSEE. THE AO ASKED THE ASSESSEE TO SHOW CAUSE WHY THESE TRANSACTIONS SHOULD NOT BE CONSIDERED AS RESU LTING INTO BUSINESS INCOME. THE ASSESSEE FILED A DETAILED REPLY DT. 7. 12.2010. THE SAME HAS BEEN EXHIBITED IN THE ASSESSMENT ORDER AT PAGES 2 T O 7. IT WAS EXPLAINED TO THE AO THAT THE ASSESSEE IS NOT ENGAGED IN ANY BUSINESS ACTIVITY. IT HAS APPOINTED PORTFOLIO MANAGERS AND THESE PORTFOLIO M ANAGERS ARE INVESTING THE MONEYS INTO VARIOUS SECURITIES. IT WAS FURTHER EXPLAINED THAT THE INVESTMENT IN EQUITY SHARES AND MUTUAL FUNDS HAVE B EEN MADE OUT OF CORPUS FUND RECEIVED FROM SETTLER OF THE TRUST. TH E SAID FUNDS HAVE BEEN USED FOR INVESTMENT ACTIVITIES ONLY. HOWEVER, THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR FROM THE AO WHO WAS OF THE OPINION THAT THE TRANSACTIONS ARE CARRIED OUT REGULARLY AND FREQUENT LY, QUANTITIES OF PURCHASE/SALES ARE GENERALLY LARGE, ASSESSEE HAS SO LD SHARES EVEN FOR LOSS WHEREAS A PRUDENT INVESTOR NORMALLY NEVER SELLS SHARES ON LOSS AND THE ASSESSEE HAS DEVOTED FULL TIME FOR CARRYING SHARE T RADING BUSINESS AS IT IS EVIDENT FROM THE FACT THAT ASSESSEE IS HAVING HUGE INCOME FOR SHARE BUSINESS. ITA NO. 2446/MUM/2012 3 3.1. THE AO FURTHER OBSERVED THAT THE INTENTION OF THE ASSESSEE WAS NOT TO MAKE INVESTMENT IN SHARES FOR A LONG RUN BENEFIT , BUT TO EARN QUICK PROFIT BY FREQUENTLY BUYING AND SELLING THE SHARES WITH AN EAGERNESS TO ACCOUNT FOR AS MUCH GAINS AS QUICKLY AS POSSIBLE UN DER THE GUISE OF STCG/LTCG. THE AO WENT ON TO DISCUSS THE GUIDELINE S ISSUED BY THE CBDT VIDE INSTRUCTION NO. 1827 DT. 31.8.1989. THER EAFTER, THE AO RELIED UPON FEW JUDICIAL PRONOUNCEMENTS AND FINALLY CONCL UDED THAT THE PROFIT ON THE SALE OF SHARES CANNOT BE TREATED AS CAPITAL PROFIT AND THUS INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE AS REVENUE PROF IT FROM SALE OF SHARES ASSESSABLE UNDER THE HEAD PROFITS AND GAINS OF BU SINESS OR PROFESSION. 4. AGGRIEVED BY THIS FINDING OF THE AO, ASSESSEE CH ALLENGED THE CORRECTNESS OF THE ASSESSMENT ORDER BEFORE THE LD. CIT(A). IT WAS EXPLAINED TO THE LD. CIT(A) THAT THE ACTION OF THE AO IS AGAINST THE FACTS OF THE CASE INASMUCH AS THE AO HAS FAILED TO APPREC IATE THE FACTS AND THE CIRCUMSTANCES IN COMING TO THE FINDING THAT THE ASS ESSEE IS NOT INTO INVESTMENT IN SHARES BUT A TRADER IN SHARES/SECURI TIES. IT WAS EXPLAINED TO THE LD. CIT(A) THAT THE PORTFOLIO MANAGERS WERE ENT RUSTED WITH THE FUNDS WITH THE SOLE OBJECTIVE OF MAKING INVESTMENT AND TH EIR OBJECTIVE IS TO PRESERVE THE CAPITAL AND ACHIEVE GROWTH IN THE CAPI TAL. IT WAS ALSO EXPLAINED THAT THERE WAS A TACIT AGREEMENT BETWEEN THE ASSESSEE AND THE PORTFOLIO MANAGER THAT PORTFOLIO MANAGER WILL NOT T RADE OR INDULGE IN ANY SPECULATION TRANSACTION ON BEHALF OF THE ASSESSEE. IT WAS ALSO EXPLAINED THAT THE TRUSTEES HAVE NOT CARRIED ON THE ACTIVITY BUT THE PORTFOLIO MANAGERS WHO WERE HANDED OVER THE FUNDS FOR WEALTH CREATION HAVE CARRIED OUT THE ACTIVITY OF INVESTMENT FOR WEALTH C REATION. WHENEVER THE FUNDS ARE GIVEN TO PORTFOLIO MANAGERS, THE ASSESSEE COULD NOT BE CONSTRUED AS CARRYING ON THE BUSINESS ACTIVITY. IT WAS ALSO POINTED OUT TO THE LD. CIT(A) THAT DURING THE YEAR UNDER CONSIDERATION, CE RTAIN SHARES ARE SOLD ITA NO. 2446/MUM/2012 4 WHICH WERE PURCHASED IN EARLIER ASSESSMENT YEARS AN D THE TREATMENT OF THE SAME WAS CAPITAL ASSET. THE SHARES WHOSE CHARAC TER IS ACCEPTED AS CAPITAL ASSET IN EARLIER ASSESSMENT YEAR, IF SOL D IN THE YEAR UNDER CONSIDERATION, THEN THE RESULTANT GAIN CAN BE TAXED ONLY UNDER THE HEAD CAPITAL GAINS. THE ASSESSEE DIRECTED THE ATTENTION TO THE LD. CIT(A) TO THE CBDT CIRCULAR NO. 4 DT. 15.6.2007 AS WELL AS INSTRU CTION NO. 1827 DT. 31.8.1989 AND POINTED OUT THAT EVEN THE CBDT HAS A CCEPTED THAT THE ASSESSEE CAN HAVE TWO TYPES OF PORTFOLIO ONE AS I NVESTMENT AND THE OTHER AS STOCK-IN-TRADE. RELIANCE WERE PLACED ON THE DECISION OF BOMBAY TRIBUNAL IN THE CASE OF JANAK S. RANGWALA VS ACIT 11 SOT 627, IN THE CASE OF GOPAL PUROHIT 20 DTR 99 , M/S. SMK SHARES & STOCK BROKING PVT. LTD. IN ITA NO. 799/M/2009, MADANGOPAL RADHEL AL 73 ITR 652, NEELKANTH AMBALAL MODI VS S.A.L. NARAYAN ROW 61 ITR 428 AND CIT VS MAHARAJKUMAR KAMAL SINGH 89 ITR 05. 5. AFTER CONSIDERING THE FACTS AND THE SUBMISSION MADE BY THE ASSESSEE, THE LD. CIT(A) RELIED UPON THE DECISION O F THE DELHI FBENCH IN THE CASE OF M/S. REDIALS INTERNATIONAL VS ACIT I N ITA NO. 1368(DEL) OF 2010 DT. 16.12.2011. THE LD. CIT(A) DISCUSSED TH E DECISION OF THE DELHI BENCH AT LENGTH. THE LD. CIT(A) RUBBISHED TH E DECISION OF THE ITAT PUNE A & B BENCH IN THE CASE OF KRA HOL DING & TRADING PVT. LTD., AND HRA TRADING & INVESTMENT PVT. LTD. , RESPECTIVELY STATING THAT THESE DECISIONS ARE RELATIVELY OLD DECISIONS. PLACING STRONG RELIANCE ON THE DECISION OF THE DELHI BENCH, THE LD. CIT(A) FINALLY CONCLUDED THAT I AM OF THE VIEW THAT AO IS QUITE JUSTIFIED IN HOL DING THAT SO CALLED SHORT TERM CAPITAL GAIN OF RS. 5,97,26,574/- AND LONG TER M CAPITAL GAIN OF RS. 8,91,000/- ARE IN FACT BUSINESS INCOME OF THE APP ELLANT. THE FINDINGS ITA NO. 2446/MUM/2012 5 AND THE CONCLUSION OF THE AO IN HOLDING THAT THE ST CG AND LTCG SHOWN BY THE APPELLANT IS BUSINESS INCOME IS THEREFORE CONFIRMED. 6. THE ASSESSEE IS AGGRIEVED BY THIS FINDING OF THE CIT[A] AND IS BEFORE US .THE LD. COUNSEL FOR THE ASSESSEE REITERA TED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. TO SUBSTANTIA TE HIS CLAIM, THE LD. COUNSEL FOR THE ASSESSEE FILED A PAPER BOOK EXPLAI NING SCRIP-WISE PURCHASE AND SALES OF SHARES AND CLAIMED THAT THE A VERAGE HOLDING PERIOD IS 178 DAYS. THE LD. COUNSEL ALSO DREW OUR ATTENTI ON TO THE VARIOUS AGREEMENTS WITH THE PORTFOLIO MANAGERS AND VEHEMENT LY SUBMITTED THAT THE ASSESSEE IS ONLY AN INVESTOR WHO HAS TAKEN THE BENEFIT OF THE SERVICES OF PMS WHO HAVE INVESTED THE FUNDS OF THE ASSESSEE IN SHARES AND SECURITIES FOR THE ENHANCEMENT OF THE WEALTH OF THE ASSESSEE. THE LD. COUNSEL RELIED UPON THE DECISION OF THE PUNE BENCH IN THE CASE OF APOORVA PATNI VS ACIT 24 TAXMANN.COM 223 (PUNE), MA NAN NALIN SHAH VS DCIT IN ITA NOS 6166, 2125 AND 4125/MUM/2008, ACIT VS SMT. KAMALA VENKAT RAMANI IN ITA NO. 149/M/2010. IT I S THE SAY OF THE COUNSEL THAT IN ALL THESE CASES, ON IDENTICAL FACTS THE TRIBUNAL HAS HELD THAT INVESTMENT THROUGH PORTFOLIO MANAGER CANNOT, I PSO-FACTO, RESULT INTO BUSINESS INCOME. 7. REBUTTING THE SUBMISSIONS MADE BY THE LD. COUNSE L FOR THE ASSESSEE, THE LD. DEPARTMENTAL REPRESENTATIVE PLACE D STRONG RELIANCE ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED T HAT THE LD. CIT(A) HAS RIGHTLY CONSIDERED THE DECISION OF THE ITAT DELHI B ENCH. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CAR EFULLY CONSIDERED THE ORDERS OF THE LOWER AUTHORITIES AND THE PAPER B OOK SUBMITTED BY THE ASSESSEE AND THE DECISIONS RELIED UPON BY THE RIVAL PARTIES. THE ASSESSEE IS A PRIVATE FAMILY TRUST. IT IS NOT IN DISPUTE TH AT THE ASSESSEE HAS INVESTED ITA NO. 2446/MUM/2012 6 ITS CORPUS FUND IN PURCHASE OF SHARES/SECURITIES TH ROUGH FOUR PORTFOLIO MANAGEMENT SERVICES NAMELY (1) RELIANCE CAPITAL ASS ET MANAGEMENT LTD. (2) DSP MERRILL LYNCH FUND MANAGERS LTD. (3) KARMA CAPITAL ADVISORS PVT. LTD., AND (4) KOTAK SECURITIES LTD. A PERUSAL OF THE CONTRACT BETWEEN THE ASSESSEE AND THE RELIANCE CAPI TAL ASSET MANAGEMENT LTD. SHOW THE INTENTION OF THE ASSESSEE AS PROVIDED AT POINT NO. 3 AT PAGE-1 OF THE AGREEMENT EXHIBITED AT PAGE- 56 OF THE PAPER BOOK WHICH IS AS UNDER: THE CLIENT IS DESIROUS OF APPOINTING THE PORTFOLIO MANAGER FOR MANAGING THE INVESTMENT OF ITS FUNDS ON A DISCR ETIONARY BASIS TO AVAIL OF INVESTMENT ADVISORY AND PORTFOLIO MANAGEMENT SERVICES FROM THE PORTFOLIO MANAGER, FOR THE PURPOSE OF INVESTMENT TO BE MADE IN SECURITIES' 9. AT CLAUSE 11.10 OF THE SAME AGREEMENT, IT IS PRO VIDED ---- THE PORTFOLIO MANAGER SHALL NOT A) TRADE ON MARGIN OR ON A SPECULATIVE BASIS ON BEHALF OF THE CLIENT. ALL TRANSACTION SHALL BE ON DELIVERY BASIS . B) PLEDGE OR GIVE LOAN ON SECURITIES HELD ON BEHALF OF THE CLIENT TO A THIRD PERSON WITHOUT OBTAINING A WRITTEN PERMISSION FROM THE CLIENT. C) THE PORTFOLIO MANAGER SHALL NOT DEAL BASED ON PRICE -SENSITIVE CLASSIFIED INFORMATION. 10. SIMILAR CLAUSES ARE FOUND IN THE AGREEMENTS WIT H OTHER THREE PORTFOLIO MANAGERS. A PERUSAL OF THESE AGREEMENTS CLEARLY SHOW THAT THE INTENTION OF THE ASSESSEE TO APPOINT THESE PORTFOLI O MANAGERS IS TO INVEST ITA NO. 2446/MUM/2012 7 ITS CORPUS FUND IN SHARES AND SECURITIES FOR WEALTH CREATION. IT IS WORTHWHILE TO NOTE HERE THAT THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN REJECTED BY THE LOWER AUTHORITIES ONLY BECAUSE THE ASSESSEE HAS ENGAGED PORTFOLIO MANAGER TO LOOK AFTER ITS INVESTMENT. FU RTHER, MORE THRUST IS GIVEN ON THE VOLUME, PERIODICITY AND FREQUENCY OF T RANSACTION. 11. THE ISSUE, WHETHER THE INCOME FROM SALE AND P URCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE TREATED AS CAPITAL GAIN OR BUSINESS INCOME HAS BEEN A DEBATABLE ISSUE AND THERE ARE CONFLICTING DE CISIONS OF THE TRIBUNAL ON THIS ISSUE. EACH CASE IS, THEREFORE, TO BE BASE D ON ITS OWN FACTUAL SITUATION. IT IS POSSIBLE FOR AN INVESTOR TO SELL SHARES AFTER HOLDING FOR LESS THAN A YEAR IN ORDER TO RESHUFFLE PORTFOLIO. IN TH E PRESENT CASE, IT IS NOT IN DISPUTE THAT THE AVERAGE HOLDING PERIOD IS 178 DAYS . THE ITAT PUNE BENCH IN THE CASE OF APOORVA PATNI VS ACIT (SUPRA) HAS HELD THAT HAVING REGARD TO OPERATING MAXIMUM OF A DISCRETIONA RY PORTFOLIO MANAGEMENT AGREEMENT, THE RELATIONSHIP BETWEEN THE PMS PROVIDER AND THE ASSESSEE CANNOT BE CONTEMPLATED AS THAT OF A ME RE AGENT AS UNDERSTOOD IN THE COMMON PARLANCE. 12 IN THIS BACKGROUND, THE FINDING OF THE LD. CIT(A) T HAT THE PMS ARE NOTHING BUT AGENTS WORKING FOR AND ON BEHALF OF TH E ASSESSEE IS NOT CORRECT. ALL DECISIONS REGARDING INVESTMENTS, ITS TIMINGS ETC. ARE MADE BY THE PMS PROVIDER AND NOT BY THE ASSESSEE PER SE, THOUGH THE RESULTANT GAIN/LOSS IS ON ACCOUNT OF THE ASSESSEES INVESTMEN T. THE CONTENTION OF THE REVENUE AUTHORITIES THAT IN RESPECT OF CERTAIN SCRI PS, THE HOLDING PERIOD WAS VERY LESS CANNOT BE HELD AGAINST THE ASSESSEE I NASMUCH AS IT HAD NO CONTROL ON SUCH DECISION MAKING IN A DISCRETIONARY PMS ARRANGEMENT BECAUSE SUCH DECISIONS WERE TAKEN BY THE PMS PROVID ER. ITA NO. 2446/MUM/2012 8 13. IN SO FAR AS OTHER OBJECTIONS OF THE REVENUE AU THORITIES THAT THERE WAS VOLUME AND FREQUENCY OF TRANSACTIONS WERE LARGE SO AS TO CONSTITUTE BUSINESS ACTIVITY. WE FIND THAT THE ASSESSEE HAS E NGAGED 4 PMS PROVIDER, HAS TRANSACTED IN 7 SHARES AND THE TOTAL NUMBER OF TRANSACTION IS 110. IN A STOCK EXCHANGE, WHERE MORE THAN 5000 SHARES ARE TRA DED EVERY DAY , THE OBSERVATIONS OF THE LOWER AUTHORITIES DO NOT CARRY MUCH WEIGHT . 14 THE LD.CIT(A) HAS HEAVILY RELIED UPON THE DECI SION OF THE DELHI BENCH IN THE CASE OF REDIAL INTERNATIONAL IN ITA N O. 1368/DEL/2010. WE FIND THAT THE BOMBAY BENCH IN THE CASE OF MANAN NA LIN SHAH IN ITA NO. 6166,2125 & 4126/M/08 HAS CONSIDERED THE DECISION O F THE DELHI BENCH. AFTER CONSIDERING THE DECISION OF THE DELHI BENCH I N DETAIL , WHILE DECIDING THE ISSUE, THE TRIBUNAL HAS THUS HELD AS U NDER: WE OBSERVE THAT THE ONLY DISPUTE IS AS TO WHETHER THE PROFIT ARISING TO THE ASSESSEE THROUGH THE TRANSACTIONS CA RRIED OUT FOR PURCHASE AND SALE OF SHARES AS WELL AS UNITS OF MUT UAL FUND THROUGH PMS IS TO BE ASSESSED UNDER THE HEAD BUSINESS INCO ME OR CAPITAL GAINS. WE OBSERVE THAT IN THE ASSESSMENT YEAR 2003-04, ASSESSEE PLACED A PART OF FUND OF RS.50 LAKHS WITH KOTAK SECURITIES AS PMS AND ENTERED INTO AGREEMENT, COPY PLACED AT P AGES 30 & 31 OF PB. IN A.Y. 2003-04, THERE IS A PROFIT OF RS.52 ,127. WE OBSERVE THAT ASSESSEE WHILE FILING THE RETURN, HAS SHOWN TH E SAID INCOME AS BUSINESS INCOME. HOWEVER, DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, ASSESSEE FILED A LETTER DATED 25.11.20 05 AND STATED THAT THE SAID INCOME IS TO BE ASSESSED UNDER THE HE AD CAPITAL GAINS. THE AUTHORITIES BELOW DID NOT ACCEPT THE S AID CONTENTION OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE DID NO T FILE A REVISE RETURN AND CLAIM MADE BY WAY OF A LETTER COULD NOT BE ACCEPTED. WE ARE OF THE CONSIDERED VIEW THAT MERELY BECAUSE A SSESSEE CLAIMED AN INCOME UNDER THE HEAD BUSINESS INCOME BUT IS TO BE ASSESSED UNDER THE LAW UNDER ANOTHER HEAD CANNOT BE REJECTED ONLY ON THE GROUND THAT NO REVISED RETURN HAS BEEN FILED . THE AO HAS TO DECIDE THE ASSESSABILITY OF INCOME UNDER CORRECT HE AD ON THE BASIS OF THE FACTS AND AS PER PROVISIONS OF I.T.ACT. MORE OVER, WHEN THE ASSESSEE HAS TAKEN THE SAID GROUND BEFORE LD CIT(A) , LD CITA) COULD NOT REJECT THE CLAIM OF THE ASSESSEE MERELY ON THE GROUND ITA NO. 2446/MUM/2012 9 THAT THE ASSESSEE HAS SHOWN PARTICULAR INCOME UNDER A PARTICULAR HEAD. IT IS A LEGAL GROUND AND THE SAME COULD BE C ONSIDERED BY LD CIT(A) ON THE BASIS OF THE FACTS AND AS PER PROVISI ONS OF LAW. THE HONBLE P&H HIGH COURT IN THE CASE OF RAMCO INTERNATIONAL(SUPRA) HAS HELD THAT NON-FILING OF THE REVISED RETURN OF INCOME SHOULD NOT COME IN THE WAY IF ALL THE RE LEVANT FACTS ARE AVAILABLE ON RECORD. CONSIDERING THE ABOVE DECISIO N, WE DECIDE THE ISSUE BEFORE US ON MERITS ON THE BASIS OF *9603 FACTS PLACED BEFORE US. WE OBSERVE THAT ASSESSEE ENTERED INTO A PMS AGREEME NT WITH KOTAK SECURITIES IN A.Y. 2003-04 AND AS PER CLAUSE 2, PMS IS AUTHORIZED TO PURCHASE, ACQUIRE, OBTAIN, TAKE, HOLD , SELL, TRANSFER, SUBSTITUTE OR CHANGE ALL OR ANY OF THE INVESTMENTS MADE ON BEHALF OF THE ASSESSEE. FURTHER CLAUSE 3 OF THE AGREEME NT FURTHER AUTHORIZES TO HOLD ALL OR ANY OF SUCH INVESTMENTS I N ITS NAME OR AT ITS DISCRETION ON BEHALF OF THE ASSESSEE. FURTHER AS PER CLAUSE 6 OF THE AGREEMENT, IT IS STATED THAT THE PORTFOLIO MANA GER WILL MAKE EVERY EFFORT TO MAXIMIZE THE VALUE OF INVESTMENT. CLAUSE 9 OF THE SAID AGREEMENT STIPULATES THAT PORTFOLIO MANGER WIL L PROVIDE THE ASSESSEE WITH QUARTERLY STATEMENT OF THE INVESTMENT S. ON PERUSAL OF THE CONTENTS OF THE AGREEMENT, WE OBSERVE THAT ASSE SSEE HAS PLACED FUNDS WITH PMS TO MAKE INVESTMENT IN SHARES/MUTUAL FUNDS AND NOT WITH A VIEW TO DO TRADE. WE ALSO OBSERVE THAT ASSE SSEE AS ON 31.3.2003 HAD A TOTAL CAPITAL OF RS.17.97 CRORES (A PPROX) AND OUT OF WHICH, A SUM OF RS.50 LAKHS WAS PLACED FOR THE F IRST TIME WITH PMS. WE OBSERVE THAT ASSESSEE ALSO MADE DIRECT INV ESTMENTS IN SHARES AND THERE WAS SHORT TERM CAPITAL GAIN OF RS .9,53,215 AND LONG TERM CAPITAL GAIN OF RS.2,13,519. THE DEPARTM ENT HAS ACCEPTED THE LONG TERM CAPITAL GAIN AS WELL AS SHOR T TERM CAPITAL GAIN SHOWN BY ASSESSEE WHICH HAS ARISEN BY MAKING D IRECTLY PURCHASE & SALES OF SHARES/UNITS. DURING THE COURS E OF HEARING, LD D.R. SUBMITTED THAT WHEN THE PORTFOLIO MANAGER IS A PPOINTED, HE ACTS AS AN AGENT ON BEHALF OF THE ASSESSEE TO DO TR ADE . HOWEVER, SIMILAR ISSUE HAS BEEN CONSIDERED BY PUNE BENCH OF TRIBUNAL IN THE CASE OF ARA TRADING & INVESTMENT PVT LTD (SUPRA ). THE RELEVANT EXTRACTS FROM PARAS 22 TO 27 HAVE BEEN PRO DUCED HEREINABOVE. WE OBSERVE THAT PORTFOLIO MANAGER IS APPOINTED IN PURSUANCE OF AN AGREEMENT, THEREFORE, THE MANAGEMEN T OF PORTFOLIO IS AN INDEPENDENT ACTIVITY AND NOT GOVERN ED BY CLIENT I.E. ASSESSEE . THE RELEVANT CLAUSES OF THE AGREEMENT, EXTRACT O F WHICH WE HAVE MENTIONED ABOVE, CLEARLY ESTABLISH THAT THE PURPOSE IS TO TAKE DECISION TO MAKE INVESTMENT AND TO PROVIDE STA TEMENT TO THE ITA NO. 2446/MUM/2012 10 ASSESSEE ON QUARTERLY BASIS. IN THE PMS, THERE IS NO ASSURED GUARANTEE AGAINST LOSS OR DEGENERATION OF CAPITAL. AS PER SEBI GUIDELINES, THE PORTFOLIO MANAGER IS AUTHORIZED TO PURCHASE AND SALE OF SHARES ON BEHALF OF THE CLIENT AGAINST SECU RITIES AFTER OBTAINING WRITTEN PERMISSION. THEY ARE NOT AUTHORI ZED TO UNDERTAKE PURCHASE AND SALE OF SECURITIES WHICH ARE SETTLED OTHERWISE THAN BY ACTUALLY DELIVERY OR TRANSFER OF SECURITIES. THE PORTFOLIO MANAGER AT THEIR OWN DISCRETION CAN MAKE INVESTMENTS. CONSIDERING THE ABOVE SCHEME OF PORTFOLIO MANAGEMEN T, WE ARE OF THE CONSIDERED VIEW THAT THE INVESTMENTS MADE BY TH E ASSESSEE THROUGH PMS IS MEANT FOR MAXIMIZATION OF WEALTH AND NOT WITH A VIEW TO DO TRADE IN PURCHASE AND SALE OF SHARES. F URTHER, WE OBSERVE THAT THE DEPARTMENT HAS NOT DISPUTED THE FA CT THAT THE PORTFOLIO MANAGER HAS THE SOLE AND ABSOLUTE DISCRET ION TO MAKE THE INVESTMENTS FOR AND ON BEHALF OF THE ASSESSEE AND T HE ASSESSEE HAS NO ROLE TO PLAY ON THE SAME. THE ASSESSEE HAS NOT TAKEN ANY BORROWING FOR MAKING INVESTMENTS FOR PLACING ITS FU NDS WITH PORTFOLIO MANAGER. WE AGREE WITH LD A.R. THAT THE DECISION OF ITAT DELHI BENCH IN THE CASE OF RADIALS INTERNATION AL (SUPRA) RELIED UPON BY LD D.R. IS NOT APPLICABLE TO THE FA CTS OF THE CASE AS IN THAT CASE, THE TRIBUNAL OBSERVED THAT HOLDING P ERIOD OF SHARES BY PORTFOLIO MANAGER RANGES FROM 2 DAYS TO FEW MONT HS AT THE MOST AND THE NUMBER OF TRANSACTIONS WERE HUGE. THE REFORE, THE TRANSACTIONS WERE FOUND TO BE NOT INVESTMENT BUT AN ADVENTURE IN THE NATURE OF TRADE. HOWEVER, IN THE CASE BEFORE US, LD A.R. HAS STATED THE RELEVANT FACTS, WHICH WE HAVE DISCUSSED HEREINABOVE, AND ON THAT BASIS, WE AGREE WITH LD A.R. THAT SAID DECISION OF DELHI BENCH OF THE TRIBUNAL IS NOT APPLICABLE TO THE CASE OF THE ASSESSEE. SIMILARLY, THE CASE OF HONBLE A.P. HIGH COURT IN THE CASE OF PVS RAJU VS ACIT(SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE AS IN THAT CASE, THE HONBLE HIGH COURT CO NSIDERED THE RELEVANT FACTORS, WHICH ARE MENTIONED IN PARA 15 OF THE SAID ORDER AND ON THAT BASIS, THE HONBLE HIGH COURT CONFIRMED THE ORDER OF THE TRIBUNAL THAT THE VOLUME OF SHARE TRANSACTIONS WERE IN THE ORDINARY LINE OF BUSINESS OF PURCHASE AND SALE OF S HARES AND NOT FOR THE PURPOSE OF INVESTMENTS. IN THE CASE BEFORE US, THE SAID FACTS ARE NOT BORNE OUT AS THE AVERAGE PERIOD OF HOLDING WAS VARYING FOR MORE THAN TWO MONTHS. SIMILARLY, WE AGREE THAT THE DECISION OF ITAT MUMBAI IN THE CASE OF MAFATLAL HOLDINGS LTD (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE AS IN THAT CASE, THE BOARD OF DIRECTORS SPECIFICALLY PASSED A RESOLU TION TO PLACE RS.100 CRORES FOR PURCHASE AND SALE OF SHARES WITH AN ASSET MANAGEMENT COMPANY AS ITS PORTFOLIO MANAGER. THERE FORE, THE ITA NO. 2446/MUM/2012 11 INTENTION WAS TO DO TRADE IN PURCHASE AND SALE OF S HARES, WHICH IS NOT THE CASE OF THE ASSESSEE. WE MAY ALSO STATE TH AT AT THE TIME OF HEARING, LD D.R. REFERRED THE DECISION OF ITAT MUMB AI IN THE CASE OF IMMORTAL FINANCIAL SERVICES PVT LTD. VS DCIT, 44 SOT 88(MUMBAI). IN THE SAID CASE, THE TRIBUNAL CONFIRM ED THE ACTION OF LD CIT(A) THAT PROFIT FROM PURCHASE AND SALE OF SHA RES IS BUSINESS INCOME CONSIDERING THE FREQUENCY OF BUYING AND SELL ING OF SHARES OVER A SHORT SPAN OF PERIOD AND ALSO THE FACT THAT THE ASSESSEE IN THE BOOKS OF ACCOUNT HAS ALSO TREATED THE INCOME AS BUSINESS INCOME AND NOT AS CAPITAL GAINS. THEREFORE, THE SAID CASE COULD NOT BE APPLICABLE TO THE FACTS OF THE PRESENT CASE. CONSIDERING ABOVE SUBMISSIONS AND CASES CITED BEFORE US, WE HOL D THAT THE VERY NATURE OF PMS IS SUCH THAT INVESTMENTS MADE BY THE ASSESSEE CANNOT BE SAID TO BE SCHEME OF TRADING OF SHARES AN D STOCKS AND, ACCORDINGLY, THE PROFIT IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS. THEREFORE, GROUNDS OF APPEAL TAKEN BY ASSE SSEE ARE ALLOWED IN PART AS INDICATED HEREINABOVE. [BOLD LETTERS FOR EMPHASIS BY US ] 15. IT IS ALSO WORTH NOTING THAT FOR THE METHOD OF VALUATION OF STOCK OF SHARES REFLECTED IN THE BALANCE SHEET, THE ADMITTED POSITION IS THAT THE ASSESSEE HAS NOT ADOPTED THE METHOD OF VALUATION AS BEING GENERALLY ADOPTED BY A BUSINESS CONCERN. A BUSINESS ASSET IS VALUED AT THE COST OR MARKET PRICE WHICHEVER IS LESS BUT IN THE ASSESSEE S CASE, IT IS NOT SO. THE ASSESSEE HAS NOT ADOPTED THE PREVALENT METHOD RATHE R THE INVESTMENTS HAVE BEEN SHOWN AT COST PRICE ONLY. THE MOST IMPORTANT FACTOR WHICH HAS BEEN IGNORED BY THE LOWER AUTHORITIES IS THAT T HERE ARE NO BORROWED FUNDS. THE ENTIRE INVESTMENTS HAVE COME O UT OF THE CORPUS FUND OF THE ASSESSEE . THEREFORE, THE SAY OF THE REVENUE AUTHORITIES TH AT THE ASSESSEE HAS INDULGED IN BUSINESS ACTIVITIES IN THE GUISE OF SHARE INVESTMENT DOES NOT HOLD ANY WATER. 13. CONSIDERING THE FACTS AND THE SUBMISSIONS AND T HE JUDICIAL DECISIONS CONSIDERED HEREINABOVE, IN OUR CONSIDERAT E VIEW, THE DECISION OF THE LD. CIT(A) SOLELY BASED ON THE FINDINGS OF T HE DELHI BENCH IS ITA NO. 2446/MUM/2012 12 ERRONEOUS , THEREFORE , REVERSING THE FINDINGS OF T HE LD. CIT(A) WE HAVE NO HESITATION TO HOLD THAT CONSIDERING THE NATURE O F TRANSACTION THROUGH PORTFOLIO MANAGEMENT SERVICES PROVIDERS IN THE LIG HT OF THE JUDICIAL PRONOUNCEMENT DISCUSSED HEREINABOVE, THE TRANSACTIO NS HAVE RESULTED INTO CAPITAL GAINS, STCG AND LTCG AS RETURNED BY THE ASS ESSEE . THEREFORE, THE AO IS DIRECTED TO ACCEPT THE CAPITAL GAINS AS R ETURNED BY THE ASSESSEE. 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 4 /5 4/ . 6 7/ . (/ 8' ORDER PRONOUNCED IN THE OPEN COURT ON 01.02.2013 3 . 2& $ 6 95 1.2.2013 2 . : SD/- SD/- ( I.P. BANSAL) (N.K. BIL LAIYA) /JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 9 DATED 01.02.2013 . . ./ RJ , SR. PS 3 . +/ ; &/ / COPY OF THE ORDER FORWARDED TO : 1. '* / THE APPELLANT 2. +,'* / THE RESPONDENT. 3. < ( ) / THE CIT(A)- 4. < / CIT 5. =: +/ , , / DR, ITAT, MUMBAI 6. :> ? / GUARD FILE. 3 / BY ORDER, , / +/ //TRUE COPY// @ / 8 ( DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI