Dy. CIT Cir - 2 Pune, Pune V. Apoorva A Patni, Pune

ITA 311/PUN/2012

• Counselvise Citation: 31124514 RSA 2012
• Duration Of Justice: 1 year(s) 2 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 15-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DILIP KOTHARI
• Keywords: Business income
• Section: 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.310/PN/2012 ASSESSMENT YEAR : 2005 - 06 DY. CIT, CIR-2 PUNE VS. RUCHI A. PATNI, S. NO. 1A IRANI MARKET COMPOUND, YERAWADA PUNE, PUNE (APPELLANT) (RESPONDENT) PAN NO. AARPP6091R ITA NO.311/PN/2012 ASSESSMENT YEAR : 2008 - 09 DY. CIT, CIR-2 PUNE VS. APOORVA A. PATNI, S. NO. 1A IRANI MARKET COMPOUND, YERAWADA PUNE, PUNE (APPELLA NT) (RESPONDENT) PAN NO. AGUPP5918J APPELLANT BY: SHRI DILIP KOTHARI RESPONDENT BY: SHRI C.H. NANIWADEKAR DATE OF HEARING : 30-04-2013 DATE OF PRONOUNCEMENT : 30-04-2013 ORDER PER R.S. PADVEKAR, JM:- THESE TWO (2) APPEALS ARE FILED BY THE REVENUE PERTAINING TO TWO DIFFERENT ASSESSEES BUT ARE HAVING IDENTICAL ISSUES WITH ALM OST COMMON FACTS AND HENCE, THESE APPEALS ARE DISPOSED OF BY THIS CO NSOLIDATED ORDER. 1. WE FIRST TAKE THE APPEAL IN THE CASE OF SMT. RUCHI A. PA TNI BEING ITA NO. 310/PN/2012 . IN THIS APPEAL, THE REVENUE HAS TAKEN MULTIPLE GROUNDS. MOST OF THE GROUNDS ARE ARGUMENTATIVE HENCE, WE DISPOSE OF THE APPEAL ON FRAMING THE ISSUES. THE FIRST ISSUE IS WHETHE R LD. CIT(A) JUSTIFIED IN HOLDING THAT THE SHORT TERM CAPITAL GAIN (STCG) OF RS.1,09,92,489/- DECLARED BY THE ASSESSEE CANNOT BE TREA TED AS INCOME FROM THE BUSINESS WHICH WAS EARNED BY ENGAGING PMS SERVICES. 2 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE 2. THE FACTS WHICH ARE REVEALED FROM THE RECORD AS UNDE R. IN THIS CASE, THE ASSESSEE FILED THE RETURN OF INCOME FOR THE A.Y. 2 005-06 DECLARING TOTAL INCOME OF RS. 4,19,17,100/- THE ASSESSMENT WAS ALSO COMPLETED U/S.143(3) DETERMINING THE INCOME OF RS.4,19,59,440 /-. SUBSEQUENTLY, THE LD. CIT-II, PUNE USING HIS POWER U/S.26 3 SET ASIDE THE ASSESSMENT ORDER AND IN COMPLIANCE WITH THE DIRECTION OF T HE LD. CIT(A), PUNE THE ASSESSING OFFICER FRAMED THE FRESH ASSESSMENT IN RESPECT OF TRANSACTIONS IN THE SHARES AND MUTUAL FUNDS. THE ASSESS ING OFFICER ACCEPTED THE TREATMENT GIVEN BY THE ASSESSEE IN RESPECT OF INCOM E EARNED FROM MUTUAL FUNDS AS A CAPITAL GAIN BUT EXPRESSED THE R ESERVATION IN RESPECT OF THE TRANSACTIONS IN SHARES AND MUTUAL FUNDS B Y ENGAGING PORTFOLIO MANAGEMENT SERVICES (PMS). THE ASSESSING OFFICER HA S OBSERVED THAT IDENTICAL ISSUE HAS BEEN DEALT WITH IN THE A SSSSEES CASE FOR THE A.YS. 2006-07 AND 2007-08 AND IN THOSE ORDERS T HE ASSESSING OFFICER HAS TREATED THE GAINS IN RESPECT OF SHARE TRANSAC TIONS THROUGH PMS AS BUSINESS PROFITS AND TAXED THE SAME UNDER THE HEAD INCOME FROM BUSINESS. THE ASSESSEE HAS MADE THE INVESTMENT IN SHARES THROUGH PMS I.E. (1) DSP ML, (2) HDFC, (3) KOTAK AND (4) ABM AMR O. THE ASSESSING OFFICER THEREFORE WORKED OUT THE TAXABLE INC OME FROM THOSE TRANSACTIONS AT RS.1,05,52,123/- AND ASSESSED THE SAME UNDER THE HEAD INCOME FROM BUSINESS. THE ASSESSEE CARRIED THE ISSU E IN APPEAL BEFORE LD. CIT(A) AND HE HELD THAT INCOME EARNED BY THE A SSESSEE BY USING THE SERVICES OF THE PMS CANNOT BE TREATED AS A B USINESS INCOME AND THE SAID INCOME IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN. THE LD. CIT(A) FOLLOWED THE DECISION ON THE SAME ISSUE OF H IS PREDECESSOR FOR THE A.YS. 2006-07 AND 2008-09 AND ALLOWED THE PLEA OF THE ASSESSEE THAT THE SAID INCOME IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAIN. NOW THE REVENUE IS IN APPEAL BEFORE US. 3. WE HAVE HEARD THE PARTIES. WE FIND THAT IDENTICAL ISSUE WAS DECIDED BY LD. CIT (A) IN ASSESSEES OWN CASE FOR THE A.Y S. 2006-07 AND 2008-09. IN SO FAR AS IN THE CASE BEING DY. CIT, CIRCLE-II , PUNE VS. MS. 3 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE RUCHI A. PATNI ITA NO.273/PN/2012 AND ORS. ORDER DATED 2 1-06-2012 THE TRIBUNAL CONFIRMED THE ORDER OF THE LD. CIT(A) AND DIS MISSED THE APPEAL FILED BY THE REVENUE. THE SAID ORDER WAS FOLLOWED BY THE TRIBUNAL IN THE APPEAL FILED BY THE REVENUE FOR THE A.Y. 2008-09. TH E OPERATIVE PART OF THE TRIBUNAL ORDER IS 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 THE A.Y. 2007-08. WE FIND THE TRIBUNAL, FOLLOWING THE ORDER OF THE TR IBUNAL IN THE GROUP CASES FOR A.Y. 2006-07, ALLOWED THE CLAIM OF SHORT TERM C APITAL GAIN AND LONG TERM CAPITAL GAIN FROM GAINS IN RESPECT OF INVESTME NT THROUGH PMS SERVICE AS AGAINST BUSINESS INCOME TREATED BY THE AO BY HOL DING AS UNDER : 3. AFTER HEARING BOTH THE SIDES, WE FIND IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATE PRECEEDING ASSESSMENT YEAR. WE FIND THE T RIBUNAL IN THE CONSOLIDATED ORDER VIDE ITA NO. 239/PN/2011 AND OTHER CONNECTED APPEALS VIDE ORDER DATED 21-06-2012 FOR A SSESSMENT YEAR 2006-07 HAS DECIDED THE ISSUE AND ALLOWED THE CLAIM OF THE ASSESSEE. THE RELEVANT OBSERVATIONS OF THE TRIBUNA L 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 I N FOCUS ARE THE TRANSACTIONS IN SHARES AND SECURITIES CARRIED O UT BY THE ASSESSEE THROUGH THE PMS PROVIDER. FURTHER, AS IT E MERGES FROM THE RECORD THAT IN THE PRESENT CASE, THE PORTF OLIO MANAGEMENT SERVICES ENGAGED BY THE ASSESSEE WERE IN THE NATURE OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVIC ES. THE FEATURES OF SUCH A SCHEME HAVE BEEN ADEQUATELY ELAB ORATED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN THE IMPUGNED ORDER AND IS ALSO BORNE OUT OF THE COPIES OF A FEW AGREEMENTS WITH THE PMS PROVIDER, WHICH HAVE BEEN P LACED IN THE PAPER BOOK AT PAGES 137 TO 183. THE COMMISSIO NER OF INCOME-TAX (APPEALS) HAS BROUGHT OUT THE FEATURES O F THE DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES AGREEME NT WHEREIN THE PMS PROVIDER HAS GOT ABSOLUTE INDEPENDE NCE IN TAKING DAY-TO-DAY DECISIONS SO FAR AS INVESTMENTS I N SHARES ETC. ARE CONCERNED. THE PMS PROVIDER RECEIVES A LUM P-SUM AMOUNT FROM THE CLIENT AND IN A DISCRETIONARY PORTF OLIO MANAGEMENT SERVICE ARRANGEMENT, AND THE PMS PROVIDE R MAKES THE INVESTMENTS AS PER HIS OWN JUDGMENT REACH ED ON THE BASIS OF HIS OWN PROFESSIONAL EXPERTISE AND ACC ORDINGLY UNDERTAKES DAY-TO-DAY DECISIONS FOR PURCHASE AND SA LE OF A PARTICULAR SCRIP WITHOUT RECOURSE TO THE CLIENT. IT IS ALSO EVIDENT THAT SUCH DECISIONS TAKEN BY THE PMS PROVID ER ARE NOT CLIENT-SPECIFIC, BUT IS TAKEN FOR A WHOLE RANGE OF CLIENTS IN HIS PORTFOLIO. NO DOUBT, THE PMS PROVIDER UNDERTAK ES THESE TRANSACTIONS IN THE NAME OF THE ASSESSEE AND THE SH ARES ARE ALSO KEPT IN DEMATERIALIZED FORM IN THE DEMAT ACCOU NT OF THE ASSESSEE. SO, HOWEVER, ALL SUCH ACTIVITIES ARE CARR IED OUT IN A FIDUCIARY CAPACITY. HAVING REGARD TO THE OPERATING MECHANICS OF A DISCRETIONARY PORTFOLIO MANAGEMENT AGREEMENT, WHICH IS IN QUESTION BEFORE US, THE RELATIONSHIP BETWEEN THE PMS PROVIDER AND THE ASSESSEE CANNOT BE CONTEMPLATED AS THAT OF A MERE AGENT AS UNDERSTOOD IN THE COMMON PARLANCE. ALL DECISIONS REGARDING INVESTMENTS, ITS TIMINGS ETC, AR E MADE BY THE PMS PROVIDER AND NOT BY THE INVESTOR PER SE, TH OUGH THE RESULTANT GAIN/LOSS IS ON ACCOUNT OF THE ASSESSEE I NVESTOR. IN THE PRESENT CASE, WE MAY ALSO NOTICE THAT AT THE TI ME OF ENGAGING THE PMS PROVIDER, THE ASSESSEE MANDATED HI S INVESTMENT OBJECTIVE WHICH CLEARLY INDICATES THE IN TENTION OF THE ASSESSEE BEHIND THE PARKING OF FUNDS WITH THE P MS 4 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE PROVIDER. THE INVESTMENT OBJECTIVE MANDATED BY THE ASSESSEE AND WHICH FORMS PART OF THE AGREEMENT WITH THE PMS PROVIDER HAS BEEN PLACED IN THE PAPER BOOK AT P AGE 159 IN THE CASE OF AGREEMENT WITH DSP MERRILL LYNCH FUN D MANAGERS LTD. WE ARE TEMPTED 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 S TOCKS WITH GOOD GROWTH PROSPECTS, ACROSS VARIOUS SECTORS. WE D O NOT WANT EXPOSURE TO ANY COMPANY IN THE INFORMATION TECHNOLOGY SECTOR AND SPECIFICALLY TO PATNI COMPUTE R 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 GROW TH PROSPECTS. CLEARLY, IT ENVISAGES THAT WHAT THE ASS ESSEE WAS LOOKING FOR BY ENGAGING THE SERVICES OF AN EXPERT, NAMELY, THE PMS PROVIDER, WAS APPRECIATION AND MAXIMIZATION OF WEALTH AND NOT MERELY ENCASHING OF PROFITS WITH A V IEW OF A TRADER. IN THE CASE SPECIFIC BEFORE US, WE FIND THA T IN THIS FACTUAL BACKGROUND, THE PLEA OF THE REVENUE THAT TH E ARRANGEMENT OF APPOINTING A PMS PROVIDER TO MANAGE THE INVESTMENTS WAS WITH AN INTENTION OF A TRADE, CANNO T BE ACCEPTED. 10. IN ANY CASE, IN SO FAR AS THE VERY NATURE OF DI SCRETIONARY PORTFOLIO MANAGEMENT SCHEME IS CONCERNED, THE SAME HAS ALREADY BEEN CONSIDERED BY OUR CO-ORDINATE BENCH IN THE CAS E OF ARA TRADING AND INVESTMENT P. LTD. AND KRA HOLDING AND TRADING P. LTD (SUPRA). ACCORDING TO THE TRIBUNAL, THE SCHEME IS FOR AN ACTIVITY OF WEALTH MAXIMIZATION RATHER THAN A PROFIT MAXIMIZA TION AND ACCORDINGLY, IT HAS BEEN HELD THAT GAIN FROM SUCH A CTIVITY WAS LIABLE TO BE CONSIDERED AS DERIVED FROM AN ACTIVITY OF INV ESTMENTS AND NOT TRADING. THEREFORE, ON THIS ASPECT OF THE CONTROVER SY, WE FIND THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) MADE NO MIS TAKE IN FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF ARA TRADING AND INVESTMENT P. LTD. AND KRA HOLDING AND TRADING P. L TD (SUPRA) AND IN HOLDING THAT THE ASSESSEE WAS INDEED ENGAGED IN AN INVESTMENT ACTIVITY WHILE APPOINTING THE PMS PROVIDER WITH REG ARD 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 FACT UAL 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 TRADED WAS NOT VERY LARGE BEING 62 ACROSS ALL THE 3 PMSS, ENGAGED DURING 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 TURNOVER IN THE INV ESTMENTS 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 TURNOV ER WAS 73.21 CRORES INVOLVING 76 SCRIPS. THIS SHOWS THAT IN THE SHARE TRADING BUSINESS ACTIVITY, THE TURNOVER WAS A LMOST 4 TIMES HIGHER EVEN THOUGH THE NUMBER OF SCRIPS WERE ONLY MARGINALLY HIGH. IT WAS EMPHASIZED THAT IN THE TRA DING ACTIVITY EVEN THOUGH THE SHARES INVOLVED WERE PROPORTIONATELY MUCH LESS AS COMPARED TO THE TURNOV ER, SINCE THE INTENTION WAS TO CARRY ON BUSINESS ACTIVITY, TH E SAME WAS SHOWN UNDER THE HEAD BUSINESS INCOME. IT ALSO 5 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE INCLUDED SPECULATIVE TRANSACTION AND DAY TRADING, W HEREAS NO SUCH TRANSACTIONS WERE ENTERED INTO BY THE PMS. THE APPELLANT HAS ALSO EMPHASIZED THAT I WAS PRUDENT INVESTMENT ACTIVITY OF THE PMS TO BUY A TARGET QUAN TITY OF A PARTICULAR SCRIP IN SMALL LOTS FOR AVERAGING PURPOS E; AND IT SHOULD NOT BE TREATED AS FREQUENT AND REPETITIVE TRANSACTIONS. THE APPELLANT THEN GOES ON TO CITE TH E 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 ALTER THE NATURE OF TRANSACTION IF THE INTENTION WAS TO HLD T HE SHARES AS INVESTMENT AND NOT AS STOCK IN TRADE. SIMILAR EXP LANATION HAS BEEN GIVEN ONCE AGAIN BY THE LETTER DT 14.6.201 0 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 E XTRACTED PORTION WITH REFERENCE TO THE STATEMENT AND TRANSAC TIONS WHICH HAVE BEEN PLACED N THE PAPER BOOK FILED BEFORE US. IN OUR CONSIDERED OPINION, THE INFERENCE DRAWN OUT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) CLEARLY ESTABLISHES THAT THE V OLUME AND FREQUENCY OF TRANSACTIONS SOUGHT TO BE MADE OUT BY THE ASSESSING OFFICER WITH REGARD TO THE IMPUGNED ACTIVITY STANDS ON AN ENTIRELY DIFFERENT FOOTING AND IS QUITE DISTINCT FROM THE AC TIVITY OF TRADING IN SHARES CARRIED OUT BY THE ASSESSEE. IN FACT, IT IS NOTABLE THAT IN THE SHARE TRADING BUSINESS CARRIED ON BY THE ASSESSEE, HE HAS CARRIED OUT CERTAIN SPECULATIVE AND TRADING ACTIVITIES AND THAT IN THE CASE OF A PMS PROVIDER, SUCH ACTIVITIES ARE PROHIBITED IN L AW. HAVING REGARD TO THE AFORESAID DISCUSSION BY THE COMMISSIONER OF I NCOME-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 BECA ME EX-DIVIDEND ON THE STOCK EXCHANGES. IN THIS REGARD, WE FIND THA T THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS FACTUALLY F OUND THE SAME TO BE CONTRARY TO MATERIAL ON RECORD AS PER THE DIS CUSSION 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 APP ELLANT HAS SOLD SOME SHARES JUST BEFORE THE DATES OF THE S HARES BECOMING EX-DIVIDEND OR THE STOCK EXCHANGES. HOWEVE R, 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. T HE SALE WAS MADE MORE THAN 3 MONTHS BEFORE THE SHARES BECAM E EX- DIVIDEND. IT DOES NOT NECESSARILY FOLLOW THAT THE D IVIDEND WAS ALREADY DECLARED IN THIS CASE AND STILL THE APP ELLANT SOLD THE SAME BEFORE THE SHARES BECOMING EX-DIVIDEN D. SIMILARLY, IN THE CASE OF ACC, TWO PARTICULAR SALE D ATES MENTIONED WHEN THE SCRIP WAS TRANSACTED BY DSPML, W ERE 24.3.2005 AND 16.11.05, WHEREAS THE EX-DIVIDEND DAT E HAS BEEN MENTIONED AS 29.3.2006. IT CANNOT THEREFORE BE SAID THAT THE APPELLANT HAD KNOWINGLY SOLD THE SHARES AF TER DECLARATION OF THE DIVIDEND BEFORE IT BECAME EX-DIV IDEND. AGAIN IN RESPECT OF SHARES OF JET AIRWAYS, THE EX-D IVIDEND DATE HAS BEEN MENTIONED AS 14.9.2005 BY THE AO, AND THE DATE OF SALE HAS BEEN MENTIONED AS 17.10.2005 AND 23.1.2006 IN THE CASE OF TWO DIFFERENT PMSS. THIS INSTANCE POINTS OUT TO A WRONG CONCLUSION BY THE AO AS HERE THE SHARES HAVE BEEN SOLD AFTER THOSE HAVE BECOME EX-DI VIDEND. COMING TO TWO MORE INSTANCES POINTED OUT BY THE AO IN THIS CHART, SHARES OF NALCO HAVE BEEN SOLD ON 30.3.2006 WHICH 6 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE WAS AFTER THE EX-DIVIDEND DATE OF 23.9.2005; AND TH E SALE OF ONGC SHARES BY DSPML WAS MADE ON 30.12.2005, WHICH ALSO IS AFTER THE EX-DIVIDEND DATE OF 1.9.2005. IT IS, THEREFORE, CLEAR THAT THE INSTANCES POINTED OUT BY THE AO DID NOT SUPPORT THIS ARGUMENT, EXCEPT IN THE CASE OF TWO OR THREE INSTANCES, WHERE THE SALE HAS BEEN MADE JUST BEFORE THE SHARES BECOMING EX-DIVIDEND; AND THERE WAS A POSSIB ILITY THAT THE DIVIDEND WOULD HAVE BEEN DECLARED AND KNOW N TO THE PMS. HOWEVER, SUCH INSTANCES ARE FEW AND FAR BE TWEEN; AND IT CANNOT LEAD TO A CONCLUSION OF INDULGING IN A BUSINESS ACTIVITY. MOREOVER, AS HAS BEEN EXPLAINED ELSEWHERE BY THE APPELLANT, SUCH DAY TO DAY DECISIONS REGARDING PURC HASE AND SALE OF PARTICULAR SCRIPS ARE NOT THAT OF THE A PPELLANT, BUT OF THE PORTFOLIO MANAGER SINCE THE APPELLANTS CASE WAS THAT OF ENGAGEMENT OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES. IT WAS EXPLAINED THAT AS PER SEBI REGULAT IONS, THERE WERE TWO TYPES OF PMSS I.E. DISCRETIONARY AND NON- DISCRETIONARY. IT WAS EXPLAINED THAT IN CASE OF DI SCRETIONARY PMS AS AVAILED BY THE APPELLANT, HE APPELLANT DID N OT HAVE CONTROL ON THE DAY TO DAY ACTIVITIES AND DID NOT GI VE ANY DIRECTIONS, EXCEPT FOR THE BROAD GUIDELINE FOR NOT PURCHASING THE SHARES OF PATNI COMPUTERS SYSTEMS LTD. SINCE IT WAS PROMOTED BY THE APPELLANT AND HIS FAMILY MEMBERS. IT WAS ALSO EXPLAINED DURING THE APPELLATE PROCEEDINGS THA T IN ACCORDANCE WITH THE ACCOUNTING STANDARD AND CBDT CIRCULAR, DIVIDEND EARNING WAS NOT THE ONLY CRITERI ON AND IN ANY CASE SUBSTANTIAL AMOUNT OF DIVIDEND OF RS 16,31 ,796/- WAS ALSO EARNED DURING THE YEAR IN THE INVESTMENTS THROUGH THE PMS. THUS, THIS POINT IS ADEQUATELY EXPLAINED. ON THIS ASPECT ALSO, WE FIND NO MATERIAL TO DIFFER WITH THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), WHICH WE HEREBY 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, THER EFORE, IT WAS TO BE REGARDED AS A BUSINESS ACTIVITY. FACTUALLY SPEAK ING, 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 WERE NOT MUCH AND THERE WERE RE ASONS FOR CHURNING OF THE INVESTMENTS BY THE PORTFOLIO M ANAGER AT DIFFERENT INSTANCES DURING THE YEAR. IT IS RELEVANT TO NOTICE THAT THE APPELLANT ALSO POINTED OUT THAT THRE WERE MANY SHARES HELD FOR A LONG TIME, EVEN UPTO 18 MONTHS, B Y THE PMS, AND SUBSTANTIAL AMOUNT OF LONG TERM CAPITAL GA IN OF RS 83,09,187/- WAS ALSO SHOWN. IN FACT, THE AO HAS TRE ATED EVEN THIS LTCG OF RS 83,09,187/- AS BUSINESS INCOME , WHICH CANNOT BE JUSTIFIED. ON THE OTHER HAND, DEPEN DING ON THE MARKET CONDITIONS, VIS-A-VIS THE ANALYSIS OF TH E FUNDAMENTALS OF PARTICULAR SCRIP, DECISION MAY HAVE TO BE TAKEN TO EXIT AT A PARTICULAR POINT OF TIME, AND TO RE-ENTER AFTER A FEW MONTHS ON CHANGE OF FUNDAMENTALS. THIS DOES NOT MEAN THAT IT WAS IN THE NATURE OF REPEATED TRAD ING ACTIVITIES IN THE SAME COMMODITY; IN WHICH CASE THE RE COULD BE MULTIPLE REPETITIONS 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 S TATEMENT IN RESPECT OF GAINS AND INVESTMENT IN SHARES THROUGH P MS PROVIDER PLACED AT PAGE 73 OF THE PAPER BOOK, THE HOLDING PE RIOD GOES UPTO EVEN 18 MONTHS BEFORE THE INVESTMENT WAS LIQUIDATED . BE THAT AS IT 7 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE MAY, THE FACTOR OF PERIOD OF HOLDING CANNOT BE ASCR IBED TO THE ASSESSEE, INASMUCH AS IT HAS NO CONTROL ON SUCH DEC ISION MAKING IN A DISCRETIONARY PMS ARRANGEMENT, BECAUSE SUCH DECIS IONS ARE TAKEN BY THE PMS PROVIDER AS WE HAVE OBSERVED EARLI ER. IN ANY CASE, IN SO FAR AS THE PRESENT CASE IS CONCERNED, T HE INVESTMENT OBJECTIVE OF THE ASSESSEE MANDATED TO THE PMS PROVI DER WAS TO ACHIEVE GROWTH PROSPECTS AND THE ACTUALITY OF TRANS ACTIONS CARRIED OUT BY THE PMS PROVIDER IN ORDER TO ACHIEVE THE STA TED INVESTMENT OBJECTIVE OF THE ASSESSEE CANNOT BE MADE A BASIS TO CHARGE THE ASSESSEE OF HAVING A DIFFERENT OBJECTIVE. CONSIDERI NG THE AFORESAID MATTERS, WE, THEREFORE, ARE OF THE VIEW THAT THE OB JECTIONS MADE OUT BY THE ASSESSING OFFICER HAVE BEEN ADEQUATELY ADDRE SSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IN COMING TO HI S FINDINGS THAT THE INVESTMENTS CARRIED OUT BY THE ASSESSEE THROUGH THE PMS PROVIDER DO NOT RESULT IN A GAIN ASSESSABLE AS BUSI NESS INCOME. 15. IN VIEW OF THE AFORESAID DISCUSSION, AND HAVING REGARD TO THE REASONINGS EXTENDED BY THE COMMISSIONER OF INCOME-TA X (APPEALS) WITH WHICH WE HEREBY AFFIRM, WE FIND THAT THE GRIEV ANCE OF THE REVENUE IN THIS APPEAL IS MISDIRECTED AND ACCORDING LY THE CONCLUSION ARRIVED AT BY THE COMMISSIONER OF INCOME -TAX (APPEALS) ON THIS ASPECT IS HEREBY AFFIRMED. THUS, ON THIS GR OUND, REVENUE FAILS. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BR OUGHT TO OUR NOTICE BY THE REVENUE THE GROUNDS RAISED BY THE REV ENUE ON THIS ISSUE ARE DISMISSED. 7. ACCORDINGLY THE REVENUE APPEAL WAS DISMISSED. S INCE NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE AGAINST THE ORDE R 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 ). CONSEQUENTLY THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. AS THE FACTS ARE IDENTICAL. IN THIS YEAR WE FIND NO REASON TO TAKE DIFFERENT VIEW THAN TAKEN BY THE TRIBUNAL FOR THE TWO YEARS I.E. 200 6-07 AND 2008- 09 AND WE ACCORDINGLY CONFIRM THE ORDER OF THE LD. CIT(A). ALL THE RELEVANT GROUNDS TAKEN BY THE REVENUE ON THIS ISSUE ARE DISMISS ED. 4. THE NEXT ISSUE IS THE DISALLOWANCE MADE BY THE ASSESS ING OFFICER U/S.14A OF RS.1,70,448/- WHICH WAS DELETED BY THE LD. CIT(A ). THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE IS ALSO CARRYING ON THE BUSINESS OF TRADING IN SHARES AND DERIVATIVES AND HAS NO T MADE ANY DISALLOWANCE U/S.14A EVEN THOUGH SHE HAS EARNED TAX FRE E DIVIDENDS DURING THE YEAR. THE ASSESSING OFFICER THEREFORE PROCEEDE D TO WORK OUT THE DISALLOWANCE U/S.14A CONSIDERING THE AVERAGE INVESTME NT AND APPLIED RATE @ 0.5% OF THE INVESTMENT AND WORKED OUT TH E DISALLOWANCE OF RS.2,79,255/-. THE LD. CIT(A) PARTLY GAVE THE RELIEF TO TH E EXTENT OF RS.1,70,448/-. THE LD. CIT ALSO CONSIDERED THE APPLICABILITY O F THE RULE 8D FOR THE A.Y. 2005-06 TO THE EXTENT OF THE TRANSACTION S THROUGH THE 8 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE PMS. IT IS OBSERVED BY THE LD. CIT(A) THAT THE EXPENDITU RE ON PMS HAS NOT BEEN CLAIMED BY THE ASSESSEE AND HENCE, THERE IS NO NEED TO MAKE ANY DISALLOWANCE. 5. IN OUR OPINION, IF THE ASSESSEE HAS NOT CLAIMED THE EXP ENDITURE THEN HOW THE DISALLOWANCE CAN BE MADE AS RIGHTLY HELD BY THE LD. CIT(A). WE FIND NO REASON TO INTERFERE WITH THE FINDING ON THIS ISSUE . ACCORDINGLY, THE RELEVANT GROUNDS TAKEN BY THE REVENUE ARE DISMIS SED. 6. NOW WE TAKE UP THE APPEAL PERTAINING TO MS. APROOVA A. PATNI ITA NO. 311/PN/2012 . THE FIRST ISSUE IS WHETHER LD. CIT(A) JUSTIFIED IN HOLDING THAT THE GAIN OF RS.69,12,076/- SHOWN BY THE ASSES SEE AS A SHORT TERM CAPITAL GAIN (STCG) CANNOT BE ASSESSED UNDER THE HEAD OF PROFIT AND GAINS OF BUSINESS OR PROFESSION. THE FACTS WHICH ARE NOTED IN THE ASSESSMENT ORDER AS UNDER. THE ASSESSING OFFICER HA S OBSERVED THAT THE ASSESSEE HAS MADE INVESTMENTS BY ENGAGING PORTFOLIO MANAGEMENT SERVICES (PMS). HE HAS ALSO OBSERVED THAT IN THE ASSESSE ES OWN CASE FOR THE A.YS. 2006-07 AND 2007-08, THE INCOME EARNED BY THE ENGAGING PMS SERVICES FROM INVESTMENT/TRANSACTIONS IN SHARES AND MUTU AL FUND WAS ASSESSED UNDER THE HEAD INCOME FROM BUSINESS. IT IS SE EN THAT THE ASSESSEE HAS ENGAGED PMS I.E. (1) DSP ML, (2) HDFC, (3) KOTA K AND USING THEIR SERVICES MADE THE INVESTMENT IN THE SHARES A S WELL AS MUTUAL FUNDS AND EARNED THE GAIN TO EXTENT OF RS.69,98,507/- AN D DECLARED THE SAME AS A SHORT TERM CAPITAL GAIN. THE ASSESSING OFFICER D ID NOT AGREE TO THE TREATMENT GIVEN BY THE ASSESSEE IN RESPECT OF THE INCOME/GAIN EARNED THROUGH ENGAGING PMS. HE WORKED OUT THE INCOME ON TRANSACTIONS THROUGH THE PMS AT RS.66,16,207/- AND BRO UGHT TO TAX THE SAID INCOME UNDER THE HEAD INCOME FROM BUSINESS. 7. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A). T HE LD. CIT(A) FOLLOWING THE ORDERS IN ASSESSEES OWN CASE PASSED BY HIS PREDECESSOR FOR THE A.YS. 2006-07, 2007-08 AND 2008-09 ALLOWED THE CLAIM OF THE ASSESSEE AND HELD THAT THE ACTIVITY OF TRANSA CTIONS IN 9 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE SHARES/MUTUAL FUNDS BY ENGAGING PMS IS AN INVESTMENT ACT IVITY AND THE RESULT AND GAIN IS ASSESSABLE UNDER THE HEAD CAPITAL GAIN AND NOT AS A BUSINESS INCOME. NOW THE REVENUE IS IN APPEAL BEFORE U S. WE HAVE HEARD THE PARTIES. 8. WE FIND THAT IN ASSESSEES OWN CASE FOR THE A.YS. 2006- 07 AND 2008-09 THE IDENTICAL ISSUES HAVE BEEN DECIDED BY THE TR IBUNAL ON THE IDENTICAL SET OF FACTS IN FAVOUR OF THE ASSESSEE IN APPEAL B EING ITA NO. 239/PN/2011 ORDER DATED 21-06-2012 A.Y. 2006-07 AND ITA NO. 1568/PN/2011 ORDER DATED 27-09-2012 A.Y. 2008-09. W E, THEREFORE FOLLOWING THE DECISION OF THE TRIBUNAL IN THE A.YS. 2006-07 AND 2008-09 DISMISS THE APPEAL FILED BY THE REVENUE ON THIS ISSUE AND T HE RELEVANT GROUNDS TAKEN BY THE REVENUE ARE DISMISSED. 9. THE NEXT ISSUE IS DISALLOWANCE OF RS.3,66,213/- MADE BY T HE ASSESSING OFFICER U/S.14A OF THE INCOME-TAX ACT WHICH IS PA RTLY DELETED BY LD. CIT(A). THE ASSESSING OFFICER HAS OBSERVED THAT TH E ASSESSEE HAS NOT MADE ANY DISALLOWANCE U/S.14A EVEN THOUGH HE HAS E ARNED TAX FREE DIVIDENDS DURING THE YEAR. THE ASSESSING OFFICER, THEREFORE, CONSIDERED THE AVERAGE INVESTMENT MADE BY THE ASSESSEE WHICH WAS WORKED OUT AT RS.7,32,42,546/-, BY TAKING THE PERCENTAGE @ 0.5% AND WORK ED OUT THE DISALLOWANCE AT 3,66,213/-. LD. CIT(A) PARTLY DELETED THE DISALLOWANCE BY GIVING THE RELIEF TO THE ASSESSEE TO THE EXTENT OF RS. 1,66,512/-. THE LD. CIT(A) HAS MADE A CATEGORICAL ASSERTION THAT THE ASSE SSEE HAS NOT CLAIMED ANY EXPENDITURE ON PMS AND HENCE, THERE IS NO NE ED TO MAKE ANY DISALLOWANCE. 10. IN OUR OPINION, IF THE ASSESSEE HAS NOT CLAIMED IN THE EXPENDITURE SO FAR AS PMS SERVICE RENDERED ARE CONCERNED THERE IS NO NEED TO MAKE ANY DISALLOWANCE INVOKING PROVISIONS OF SECTION 14A. WE ACCO RDINGLY CONFIRM THE ORDER OF THE LD. CIT(A) AND RELEVANT GROUND T AKEN BY THE REVENUE ARE DISMISSED. 10 ITA NOS. 310 & 311/PN/2012, RUCHI A PATNI & APROOVA A PATNI, PUNE 11. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 30-04-2013 SD/- SD/- (R.K. PANDA) (R.S. PADVEKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER RK/PS PUNE, DATED: 30 TH APRIL, 2013 COPY TO 1 THE ASSESSEE 2 THE DEPARTMENT 3 THE CIT(A) - II, PUNE 4 THE C C IT , PUNE 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE