PRADEEP MALLICK, MUMBAI V. DCIT (OSD) 12, MUMBAI

ITA 2811/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3399 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2008-2009
• Appeal Filed On: 25-04-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Keywords: Business income; Opportunity of being heard; Rule of consistency; Earning of tax free income; Cost of acquisition; Revised return
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JM AND SHRI N.K. BILLAI YA, AM ./I.T.A. NO. 2811/MUM/2012 ( / ASSESSMENT YEAR : 2008-09 SHRI PRADEEP MALLICK, A-2, PALLONJI MANSION, 43, CUFFE PARADE, MUMBAI-400 005 / VS. THE DCIT (OSD)-12, MUMBAI ./ ./PAN/GIR NO. :AAIPM 3600N ( ! /APPELLANT ) .. ( '#! / RESPONDENT ) ! $ / APPELLANT BY: SHRI MEHUL SHAH '#! % $ / RESPONDENT BY : SHRI O.P. MEENA % &' / DATE OF HEARING : 13.5.2013 () % &' / DATE OF PRONOUNCEMENT : 17.5.2013 *+ / O R D E R PER N.K. BILLAIYA, AM: WITH THIS APPEAL THE ASSESSEE HAS CHALLENGED THE C ORRECTNESS OF THE ORDER OF THE LD. CIT(A) 23, MUMBAI DT.28.2.2012 PE RTAINING TO A.Y. 2008-09. 2. THE ASSESSEE HAS RAISED FOLLOWING THREE SUBSTANT IVE GROUNDS OF APPEAL: 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, LD. CIT(A) ERRED IN UPHOLDING ACTION OF THE AO IN TREATING STCG AMOUNTING TO RS. 29,57,586/- AND LTCG AMOUNTING TO RS. 9,65,458/- EARNED BY THE APPELLANT THROUGH ITA NO. 2811/M/2012 2 INVESTMENT IN PORTFOLIO MANAGEMENT SCHEME (PMS) AS PROFITS AND GAINS OF BUSINESS WITHOUT APPRECIATING THAT ALL ACTIONS OF YOUR APPELLANT IN EARNING THE INCOME WER E INDICATIVE OF HIS BEING INVESTOR, AND NOT OF A BUSI NESS PERSON. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AN D IN LAW, LD. CIT(A) ERRED IN GIVING DIRECTION FOR ENHANCEMEN T OF ASSESSMENT TO THE AO WITH RESPECT TO LTCG THAT WERE TREATED AND ACCEPTED BY THE AO AS EXEMPT IN NATURE U/S. 10( 38) TO BE TREATED AS BUSINESS RECEIPT WITHOUT OFFERING AN OPP ORTUNITY TO YOUR APPELLANT OF BEING HEARD ON THE MATTER OF ENHA NCEMENT. 3. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AN D IN LAW, LD. CIT(A) ERRED IN UPHOLDING ACTION OF THE AO IN DISALLOWING RS. 2,45,667/- INVOKING PROVISIONS OF R ULE 8D R.W.S. 14A AGAINST DIVIDEND INCOME AND FURTHER DIRE CTING THE AO TO INCLUDE EVEN OTHER EXPENSES ON PMS ALLOWED CONSEQUENTIALLY FOR DISALLOWANCE IGNORING THE FACT THAT, THERE WERE NO CORRESPONDING EXPENSES, ESPECIALLY EXPENSES DIRECTLY ATTRIBUTABLE TO PROFESSION, INCURRED OR CL AIMED BY THE APPELLANT TO SUSTAIN THE DISALLOWANCE. 3. THE SUM AND SUBSTANCE OF GROUND NO. 1 &2 IS THAT THE LD. CIT(A) ERRED IN HOLDING THAT SHORT TERM CAPITAL GAIN(STCG) AMOUNTING TO RS. 29,57,586/- AND LONG TERM CAPITAL GAINS (LTCG)AMOU NTING TO RS. 9,65,458/- ON SALE OF THE INVESTMENTS THROUGH PORT FOLIO MANAGER AS BUSINESS INCOME AND NOT CAPITAL GAINS. 4. THE ASSESSEE IS A MANAGEMENT CONSULTANT FROM WHI CH IT REPORTED AN INCOME AMOUNTING TO RS. 17,52,556/-. THE ASSESSEE IS ALSO A DIRECTOR IN COMPANIES FROM WHICH HE RECEIVED DIRECTORS SITTING FEES AT RS. 8,95,500/- AND DIRECTORS REMUNERATION AT RS. 6,00, 000/-. THE ASSESSEE HAS ENTRUSTED HIS SURPLUS FUNDS TO FOUR PORTFOLIO MANAGERS WHO ARE REGISTERED WITH SEBI. DURING THE COURSE OF THE SCRU TINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT TH E ASSESSEE HAS SHOWN ITA NO. 2811/M/2012 3 LTCG AT RS. 4,64,126/- AND STCG AT RS. 35,04,207/-. OUT OF THIS STCG, THE ASSESSEE HAS SHOWN RS. 29,57,586/- AS STC G ON SALE OF SHARES THROUGH PMS AND BALANCE OF RS. 5,46,622/- IS SHOWN AS STCG AS SALE OF MUTUAL FUNDS. THE AO FURTHER OBSERVED THAT THE AS SESSEE HAS SHOWN THE BREAK-UP OF STCG DERIVED FROM FOUR PORTFOLIO MANAGE MENT SERVICES. THE ASSESSEE WAS ASKED TO FILE THE DETAILS. ANALYZ ING THE DETAILS FILED BY THE ASSESSEE, THE AO NOTICED THAT THE ASSESSEE HAS DEALT IN ABOUT 220 TRANSACTIONS IN SHARES OF TOTAL 79 COMPANIES INCLUD ING PURCHASES AND SALES. THE AO WAS OF THE FIRM BELIEF THAT CONSIDER ING THE MAGNITUDE OF TRANSACTIONS AND THE VOLUME OF SHARES TRADED BY THE ASSESSEE, THE ASSESSEE WAS NOT AN INVESTOR BUT A DEALER IN SHARES. THEREF ORE, THE AO ASKED THE ASSESSEE TO JUSTIFY HIS CLAIM OF STCG AND WHY IT SH OULD NOT BE TREATED AS BUSINESS INCOME. 4.1. THE ASSESSEE FILED A DETAILED REPLY DT. 22.11. 2010 WHICH HAS BEEN INCORPORATED BY THE AO IN HIS ASSESSMENT ORDER AT P ARA-3.2. THE EXPLANATION OF THE ASSESSEE DID NOT FIND ANY FAVOUR FROM THE AO. THE AO WENT ON TO DISCUSS THE GUIDELINES ISSUED BY CBDT IN ITS CIRCULAR NO. 4/2007 DT. 15.6.2007. THE AO WAS OF THE FIRM BELIE F THAT THE ASSESSEE IS ENGAGED IN THE ACTIVITY OF DEALING IN SHARE TRANSAC TIONS. THE PROFIT FROM WHICH OUGHT TO HAVE BEEN DECLARED UNDER THE HEAD B USINESS INCOME. THE AO WENT ON TO RELY UPON CERTAIN JUDICIAL DECISI ONS AND CONCLUDED THAT THE STCG OF RS. 29,57,586/- OUGHT TO HAVE BEEN TREATED AS BUSINESS INCOME AND ACCORDINGLY TREATED THE SAME UNDER THE H EAD BUSINESS INCOME. 4.2. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. TO HIS DISMAY, THE ASSESSEE FOUND TH AT NOT ONLY THE LD. CIT(A) CONFIRMED THE ASSESSMENT ORDER BUT HAS ALSO DIRECTED TO TREAT THE ITA NO. 2811/M/2012 4 LTCG UNDER THE HEAD BUSINESS INCOME WITHOUT GIVING ANY OPPORTUNITY OF BEING HEARD FOR ENHANCING THE ASSESSMENT. THE LD. C IT(A) HAS HEAVILY RELIED UPON THE DECISION OF DELHI BENCH IN THE CASE OF RADIALS INTERNATIONAL VS ACIT IN ITA NO. 1368 (DEL) OF 2010 . THE LD. CIT(A) WAS CONVINCED THAT THE DECISION OF THE DELHI BENCH SQUARELY APPLY ON THE FACTS OF THE CASE AND CONFIRMED NOT ONLY THE ASSESS MENT ORDER BUT ALSO DIRECTED THE AO TO TREAT LTCG AS BUSINESS INCOME. 5. AGGRIEVED BY THIS FINDING OF THE LD. CIT(A), THE ASSESSEE IS BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. THE LD. COUNSEL FOR THE ASSESSEE HAS FILED PAPER BOOKS EXPLAINING SCRIP-WISE PURCHASE AND SALE S OF SHARES AND EXPLAINED THAT THE ASSESSEE HAS ENGAGED PORTFOLIO M ANAGERS TO LOOK AFTER HIS INVESTMENT AND BEING A DISCRETIONARY PORTFOLIO MANAGEMENT AGREEMENT, THE ASSESSEE HAD NO CONTROL OVER THE PU RCHASE AND SALE OF SHARES. IT IS THE SAY OF THE COUNSEL THAT THE LD. CIT(A) HAS GROSSLY ERRED IN RELYING UPON THE DECISION OF THE DELHI BENCH IN THE CASE OF RADIALS INTERNATIONAL IGNORING THE DECISION OF THE MUMBAI B ENCHES IN THE CASE OF RADHA BIRJU PATEL IN ITA NO. 5382/MUM/09, MANAN N ALIN SHAH IN ITA NOS. 6166, 2125 & 4126/M/08 AND SALIL SHAH FAMILY P VT. TRUST IN ITA NO. 2446/M/12. 7. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. ITA NO. 2811/M/2012 5 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EVIDENCES BROUGHT ON RECORD IN THE FORM OF PAPER BOOK. THE ISSUE WHETHER THE INCO ME FROM SALE AND PURCHASE OF SHARES IN A PARTICULAR CASE SHOULD BE T REATED AS CAPITAL GAIN OR BUSINESS INCOME HAS BEEN A DEBATABLE ISSUE AND THER E ARE CONFLICTING DECISIONS OF THE TRIBUNAL ON THIS ISSUE. EACH CAS E IS, THEREFORE, TO BE BASED 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. IT IS WORTHWHILE TO NOTE THAT THE SUBMISSIONS OF THE ASSESSEE HAS BEEN REJECTED BY THE LOWER AUTHORITIES ONLY BECAUSE THE ASSESSEE HAS ENGAGED PORTFOLIO MANAGER TO LOOK AFTER HIS INVESTMENT. F URTHER , MORE THRUST IS GIVEN ON THE VOLUME, PERIODICITY AND FREQUENCY OF T RANSACTION. IN THIS BACKGROUND, THE FINDING OF THE LD. CIT(A) ) THAT TH E PMS ARE NOTHING BUT AGENTS WORKING FOR AND ON BEHALF OF THE ASSESSEE IS NOT CORRECT. ALL DECISIONS REGARDING INVESTMENTS, ITS TIMINGS ETC. A RE MADE BY THE PMS PROVIDER AND NOT BY THE ASSESSEE PER SE, THOUGH THE RESULTANT GAIN/LOSS IS ON ACCOUNT OF THE ASSESSEES INVESTMENT. THE AO HI MSELF HAS ADMITTED AT PAGE-6 OF HIS ORDER THAT THE MAXIMUM NUMBER OF SHAR ES ARE SOLD WITHIN 3 TO 4 MONTHS WHICH SHOW THAT THE AVERAGE HOLDING OF SHARES IS AROUND 120 DAYS. MOREOVER, THIS CANNOT BE HELD AGAINST THE A SSESSEE INASMUCH HE HAS NO CONTROL ON SUCH DECISION MAKING IN A DISCRET IONARY PMS ARRANGEMENT BECAUSE SUCH DECISIONS WERE TAKEN BY TH E PMS PROVIDER. 9. IN SO FAR AS OTHER OBJECTIONS OF THE REVENUE AUT HORITIES THAT THERE WAS VOLUME AND FREQUENCY OF TRANSACTIONS WERE LARGE SO AS TO CONSTITUTE BUSINESS ACTIVITY. THE AO HIMSELF HAS NOTED THAT THE ASSESSEE HAS DEALT IN ABOUT 220 TRANSACTIONS IN SHARES OF TOTAL 79 COM PANIES. IN A STOCK EXCHANGE, WHERE MORE THAN 5000 COMPANIES SHARES A RE TRADED EVERY DAY, THE OBSERVATIONS OF THE LOWER AUTHORITIES DO N OT CARRY MUCH WEIGHT . ITA NO. 2811/M/2012 6 10. THE LD.CIT(A) HAS HEAVILY RELIED UPON THE DECIS ION OF THE DELHI BENCH IN THE CASE OF REDIAL INTERNATIONAL (SUPRA). WE FIND THAT THE BOMBAY BENCH IN THE CASE OF MANAN NALIN SHAH (SUPRA ) HAS CONSIDERED THE DECISION OF THE DELHI BENCH AND AFTER CONSIDERI NG THE DECISION OF THE DELHI BENCH IN DETAIL , WHILE DECIDING THE ISSUE, T HE TRIBUNAL HAS THUS HELD AS UNDER: 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 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. ITA NO. 2811/M/2012 7 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 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 ITA NO. 2811/M/2012 8 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 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 ITA NO. 2811/M/2012 9 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 ] 11. 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 OF ACQUISITION INCLUDING BR OKERAGE. THE MOST IMPORTANT FACTOR WHICH HAS BEEN IGNORED BY THE LOWE R AUTHORITIES IS THAT THERE ARE NO BORROWED FUNDS. THE ENTIRE INVES TMENTS WERE COME OUT FOR ASSESSEES OWN FUNDS . IT IS ALSO WORTH TO NOTE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF PORTFOLIO MANAGEMENT AMOUNTING TO RS. 11,09,634/- HAS NOT BEEN CLAIMED AS DEDUCTION. 12. IT IS ALSO SEEN THAT FOR THE IMMEDIATELY PRECED ING ASSESSMENT YEAR I.E. 2005-06 WHICH WAS COMPLETED U/S. 143(3), THE T RANSACTIONS WITH PMS HAVE BEEN ACCEPTED AS RESULTING INTO CAPITAL GAINS. SAME VIEW HAS BEEN TAKEN FOR A.Y. 2006-07 AND 2007-08 . IN IMMEDIATELY SUCCEEDING ASSESSMENT YEAR I.E. 2009-2010. ONCE AGAIN ASSESSM ENT U/S. 143(3), THE TRANSACTIONS WITH PMS HAVE BEEN ACCEPTED AS RESULTI NG INTO CAPITAL GAINS. 13. CONSIDERING THE FACTS AND THE SUBMISSIONS, THE JUDICIAL DECISIONS AND THE RULE OF CONSISTENCY CONSIDERED HEREINABOVE, IN OUR CONSIDERATE VIEW, THE DECISION OF THE LD. CIT(A) SOLELY BASED O N THE FINDINGS OF THE ITA NO. 2811/M/2012 10 DELHI BENCH IS ERRONEOUS , THEREFORE , REVERSING TH E FINDINGS OF THE LD. CIT(A) WE HAVE NO HESITATION TO HOLD THAT CONSIDERI NG THE NATURE OF TRANSACTION THROUGH PORTFOLIO MANAGEMENT SERVICES PROVIDERS IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENT DISCUSSED HEREINABOVE , THE TRANSACTIONS HAVE RESULTED INTO CAPITAL GAINS, STCG AND LTCG AS RETURNED BY THE ASSESSEE . THEREFORE, THE AO IS DIRECTED TO ACCEPT THE CAPITAL GAINS AS RETURNED BY THE ASSESSEE. THIS GROUNDS OF THE ASSES SEE ARE ALLOWED. 14. GROUND NO. 3 RELATES TO DISALLOWANCE OF RS. 2,4 5,667/- INVOKING PROVISIONS OF RULE 8D, 15. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PR OCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS SHOWN DIVIDEND INCO ME FROM MUTUAL FUND AT RS. 11,06,052/- AND RS. 1,41,773/- ON EQUIT Y SHARES WHICH HAS BEEN CLAIMED AS EXEMPT FROM TAX. THE AO OBSERVED T HAT THE ASSESSEE HAS NOT ALLOCATED ANY EXPENSE TOWARDS EARNING OF THE DI VIDEND INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN WHY DISALLOWANCE U/S. 14A SHALL NOT BE MADE AS PER RULE 8D. IT WAS EXPLAINED THAT THE INV ESTMENTS ARE MANAGED BY PORTFOLIO MANAGERS THEREFORE THE ASSESSEE IS NOT ENGAGED IN DAY TODAY MANAGEMENT OF THE PORTFOLIO. IT WAS FURTHER EXPLAIN ED THAT THE ENTIRE INVESTMENT ACTIVITY IS BEING MANAGED BY THESE PORTF OLIO MANAGERS FOR WHICH A CHARGE OF RS. 11,09,634 /- IS RECOVERED BY THEM AND THE SAME HAS NOT BEEN CLAIMED AS DEDUCTION AGAINST ANY INCOME A ND ARE DEBITED TO THE CAPITAL ACCOUNT. 16. SIMILARLY DEMAT CHARGES AND STT ARE ALSO NOT C LAIMED AGAINST ANY INCOME. THEREFORE, ALL THE EXPENSES INCURRED FOR E ARNING EXEMPT INCOME OF DIVIDEND ARE INCURRED SEPARATELY , IDENTIFIED S EPARATELY, AND NOT CLAIMED AS DEDUCTION AGAINST ANY INCOME. IT WAS AL SO EXPLAINED THAT THE ASSESSEE DOES NOT HAVE ANY BORROWED FUNDS THEREFORE THERE IS NO QUESTION ITA NO. 2811/M/2012 11 OF PAYING ANY INTEREST. THE SUBMISSIONS OF THE ASS ESSEE DID NOT FIND ANY FAVOUR FROM THE AO WHO WAS OF THE FIRM BELIEF THAT DISALLOWANCE U/S. 14A IS TO BE MADE BY INVOKING RULE 8D AND WENT ON TO CO MPUTE THE DISALLOWANCE AT RS. 2,45,667/-. 17. THE ASSESSEE STRONGLY AGITATED THIS MATTER BEFO RE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 18. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REI TERATED THAT NO DIRECT EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE AS THE INVESTMENT IS MANAGED BY PMS. 19. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED T HE FINDINGS OF THE LD. CIT(A). 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THA T THE ENTIRE INVESTMENT ACTIVITIES HAVE BEEN CARRIED OUT THROUGH PMS. IT I S ALSO AN ADMITTED FACT THAT THE CHARGES RECOVERED BY THE PORTFOLIO MANAGER RS.11,09, 634 /- HAS NOT BEEN CLAIMED BY THE ASSESSEE AS DEDUCTION. IT IS ALSO AN ADMITTED FACT THAT DEMAT CHARGES AND STT PAID ARE SEPARATELY DEB ITED TO CAPITAL ACCOUNT. MEANING THEREBY THAT THESE HAVE ALSO NOT BEEN CLAIMED AS EXPENSES. A PERUSAL OF THE PROFIT AND LOSS ACCOUNT SHOWS THAT THE ONLY INDIRECT EXPENSE CHARGED TO THE P&L ACCOUNT ARE TEL EPHONE AND INTERNET EXPENSE AT RS. 95,962/-, COURIER CHARGES AT RS. 505 /- AND BANK CHARGES RS. 279/- WHICH MAY HAVE SOME CO-RELATION WITH THE EARNING OF THE EXEMPT INCOME. THEREFORE, IN OUR CONSIDERATE VIEW, A DISALLOWANCE OF 20% OF THESE CHARGES I.E. TELEPHONE, COURIER AND BA NK CHARGES AMOUNTING TO RS. 19,350/- WOULD MEET THE ENDS OF JUSTICE. WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE OF RS. 19,350/-. FINDING S OF THE LD. CIT(A) ARE MODIFIED. THIS GROUND OF THE ASSESSEE IS PARTLY AL LOWED. ITA NO. 2811/M/2012 12 21. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. , &- ,& % . + /& % & 01 ORDER PRONOUNCED IN THE OPEN COURT ON 17.5.2013 . *+ % ) . 2*- 17.5.2013 ) % 3 SD/- SD/- (VIJAY PAL RAO ) ( N.K. BILLAIYA ) * /JUDICIAL MEMBER * / ACCOUNTANT MEMBER MUMBAI; 2* DATED 17/05/2013 . . ./ RJ , SR. PS *+ *+ *+ *+ % %% % '&4 '&4 '&4 '&4 54& 54& 54& 54& / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '#! / THE RESPONDENT. 3. 6 ( ) / THE CIT(A)- 4. 6 / CIT 5. 473 '& , , / DR, ITAT, MUMBAI 6. 38 9 / GUARD FILE. *+ *+ *+ *+ / BY ORDER, #4& '& //TRUE COPY// : :: : / 0 0 0 0 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI