DCIT.Cir.-2, Pune V. Shri Atul J. Khanna, Pune

ITA 633/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9766 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 16-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINITA MENON
• Keywords: Business income
• Section: 143(3); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 633 AND 634/PN/2011 (ASSESSMENT YEAR: 2006-07 & 2007-08) DY. CIT CIR. 2, PUNE .. APPELLANT VS. SHRI ATUL J. KHANNA 11, FLORINA ESTATE, BOAT CLUB ROAD, PUNE-411 001 PAN ADQPK 9690 K JT. CIT RANGE 10, PUNE RESPONDENT APPELLANT BY : MS. VINITA MENON RESPONDENT BY : SHRI JAYESH DADIA DATE OF HEARING: 05-11-2012 DATE OF PRONOUNCEMENT: 20 -11-2012 ORDER PER G.S. PANNU, A.M.: THESE TWO APPEALS BY THE REVENUE ARE DIRECTED AGAI NST IDENTICAL ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-II PUNE DATED 14-2-2011 WHICH, IN TURN, HAVE ARISEN FR OM ORDERS DATED 29-12-2008 AND 14-12-2009 PASSED BY THE ASSESSING O FFICER, UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHOR T THE ACT), PERTAINING TO THE ASSESSMENT YEARS 2006-07 AND 2007 -08 RESPECTIVELY. 2. THE SUBSTANTIVE DISPUTE RAISED BY THE REVENUE IS DIRECTED AGAINST THE DECISION OF THE CIT(A) IN HOLDING THAT THE ACTIVITY OF TRANSACTING IN SHARES/MUTUAL FUNDS BY ENGAGING A PO RTFOLIO MANAGEMENT SERVICES (IN SHORT THE PMS) WAS AN INV ESTMENT ACTIVITY SO AS TO ASSESS THE RESULTANT GAINS UNDER THE HEAD CAPITAL GAINS AND NOT AS BUSINESS INCOME, AS CONTENDED B Y THE ASSESSING OFFICER. 2 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 3. BRIEFLY THE FACTS GIVING RISE TO THE AFORESAID D ISPUTE AS ALSO THE REASONING ADVANCED BY THE ASSESSING OFFICER CAN BE SUMMARIZED AS FOLLOWS. ITA NO. 633/PN/2011 FOR A.Y. 2006-07 4. THE ASSESSEE AN INDIVIDUAL FILED HIS RETURN OF I NCOME FOR THE ASSESSMENT YEAR 2006-07 DECLARING A TOTAL INCOME OF RS 4,09,14,763/-. UNDER VARIOUS HEADS OF INCOME, VIZ. BUSINESS INCOME, CAPITAL GAINS AND INCOME FROM OTHER SOURCES. THE IN COME DECLARED UNDER THE HEAD CAPITAL GAINS INCLUDED SHORT TERM AS WELL AS LONG TERM CAPITAL GAIN ON INVESTMENTS MADE THROUGH THE PMS PR OVIDERS. BESIDES, THE ASSESSEE HAS ALSO DECLARED CAPITAL GAI NS, BOTH LONG TERM AND SHORT TERM, FROM DIRECT DEALING IN MUTUAL FUNDS, INVESTMENTS ALSO. APART FROM THE AFORESAID DEALINGS IN SHARES A ND SECURITIES, THE ASSESSEE ALSO HAD A PORTFOLIO WHEREIN INCOME FROM S HARE AND SECURITIES TRANSACTIONS WAS DECLARED AS BUSINESS IN COME. IN THIS FACTUAL BACKGROUND, THE ASSESSING OFFICER TREATED T HE SHORT TERM AS WELL AS LONG TERM CAPITAL GAIN EARNED THROUGH THE I NVESTMENTS MADE THROUGH PMS PROVIDERS AMOUNTING TO RS 59,32,707/- (AS DETAILED IN PARA 10 OF THE ASSESSMENT ORDER) AS INCOME WHICH WA S LIABLE TO BE ASSESSED AS BUSINESS INCOME AND NOT UNDER THE HEA D CAPITAL GAINS. THE INCOME FROM SUCH ACTIVITY DECLARED BY T HE ASSESSEE AS CAPITAL GAINS WAS REWORKED FOR BEING ASSESSED UNDER THE HEAD BUSINESS INCOME BY ALLOWING DEDUCTION FOR CERTAIN EXPENSES AMOUNTING TO RS 1,94,97,279/- AND ACCORDINGLY INCOM E WAS COMPUTED AT RS 3,11,57,782/- WHICH HAS SINCE BEEN A SSESSED AS BUSINESS INCOME. THE COMMISSIONER OF INCOME-TAX (AP PEALS) HAS, HOWEVER, NOT APPROVED THE CONCLUSION ARRIVED AT BY THE ASSESSING OFFICER, AND INSTEAD CONCLUDED THAT TRANSACTION IN SHARES THROUGH THE PMS PROVIDER WAS TO BE VIEWED AS AN INVESTMENT ACTI VITY RESULTING IN ASSESSABILITY OF GAIN UNDER THE HEAD CAPITAL GAINS AND NOT AS 3 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 BUSINESS INCOME. AGAINST THIS DECISION OF THE CIT (A) THE REVENUE IS IN APPEAL BEFORE US. 8. HAVING HEARD BOTH THE PARTIES AND PERUSED THE MA TERIAL ON RECORD, WE FIND THAT ON AN IDENTICAL ISSUE, THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF APPORVA PATNI VS. ADDI TIONAL CIT(2012) 24 TAXMANN.COM 223 (PUNE.TRIB), TO WHICH ONE OF US (ACCOUNTANT MEMBER) WAS A PARTY, HAS AFFIRMED A SIMILAR STAND O F THE CIT(A) BY OBSERVING AS UNDER: 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. OSTENSIBLY, IN THE PRESENT CASE, THE TRANSACTIONS IN FOCUS ARE THE TRANSACTIONS IN SHARE S AND SECURITIES CARRIED OUT BY THE ASSESSEE THROUGH THE PMS PROVIDER. FURTHER, AS IT EMERGES FROM THE RECORD TH AT IN THE PRESENT CASE, THE PORTFOLIO MANAGEMENT SERVICES ENGAGED BY THE ASSESSEE WERE IN THE NATURE OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES. THE FEATURES OF SUCH A SCHEME HAVE BEEN ADEQUATELY ELABORATED BY THE COMMISSIONER OF INCOME-TAX (APPEA LS) IN THE IMPUGNED ORDER AND IS ALSO BORNE OUT OF THE COPIES OF A FEW AGREEMENTS WITH THE PMS PROVIDER, WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 1 37 TO 183. THE COMMISSIONER OF INCOME-TAX (APPEALS) HA S BROUGHT OUT THE FEATURES OF THE DISCRETIONARY PORTF OLIO MANAGEMENT SERVICES AGREEMENT WHEREIN THE PMS PROVIDER HAS GOT ABSOLUTE INDEPENDENCE IN TAKING DA Y-TO- DAY DECISIONS SO FAR AS INVESTMENTS IN SHARES ETC. ARE CONCERNED. THE PMS PROVIDER RECEIVES A LUMP-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 ACCORDINGLY UNDERTAKES DAY-TO-DAY DECISIONS FOR PURCHASE AND SALE OF PARTICULAR SCRIP WITHOUT RECOU RSE TO THE CLIENT. IT IS ALSO EVIDENT THAT SUCH DECISIONS TAKEN BY THE PMS PROVIDER ARE NOT CLIENT-SPECIFIC, BUT IS TA KEN FOR A WHOLE RANGE OF CLIENTS IN HIS PORTFOLIO. NO DOUB T, THE PMS PROVIDER UNDERTAKES THESE TRANSACTIONS IN THE N AME OF THE ASSESSEE AND THE SHARES ARE ALSO KEPT IN DEMATERIALIZED FORM IN THE DEMAT ACCOUNT OF THE ASSESSEE. SO, HOWEVER, ALL SUCH ACTIVITIES ARE CARR IED OUT IN A FIDUCIARY CAPACITY. HAVING REGARD TO THE OPERA TING MECHANICS OF A DISCRETIONARY PORTFOLIO MANAGEMENT AGREEMENT, WHICH IS IN QUESTION BEFORE US, THE RELATIONSHIP BETWEEN THE PMS PROVIDER AND THE ASSES SEE CANNOT BE CONTEMPLATED AS THAT OF A MERE AGENT AS UNDERSTOOD IN THE COMMON PARLANCE. ALL DECISIONS REGARDING INVESTMENTS, ITS TIMINGS ETC, ARE MADE BY THE PMS PROVIDER AND NOT BY THE INVESTOR PER SE, THOUGH THE RESULTANT GAIN/LOSS IS ON ACCOUNT OF THE ASSESSEE INVESTOR. IN THE PRESENT CASE, WE MAY ALSO NOTICE T HAT AT THE TIME OF ENGAGING THE PMS PROVIDER, THE ASSESSEE 4 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 MANDATED HIS INVESTMENT OBJECTIVE WHICH CLEARLY INDICATES THE INTENTION OF THE ASSESSEE BEHIND THE PARKING OF FUNDS WITH THE PMS PROVIDER. THE INVESTM ENT OBJECTIVE MANDATED BY THE ASSESSEE AND WHICH FORMS PART OF THE AGREEMENT WITH THE PMS PROVIDER HAS BEE N PLACED IN THE PAPER BOOK AT PAGE 159 IN THE CASE OF AGREEMENT WITH DSP MERRILL LYNCH FUND 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 STOCKS WITH GOOD GROWTH PROSPECTS, ACROSS VARIOUS SECTORS. WE DO 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 DOMINAN T INTENTION OF THE ASSESSEE OF MAKING INVESTMENTS WIT H A VIEW OF GROWTH PROSPECTS. CLEARLY, IT ENVISAGES T HAT 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 MER ELY ENCASHING OF PROFITS WITH A VIEW OF A TRADER. IN TH E CASE SPECIFIC BEFORE US, WE FIND THAT IN THIS FACTUAL BACKGROUND, THE PLEA OF THE REVENUE THAT THE ARRANGEMENT OF APPOINTING A PMS PROVIDER TO MANAGE THE INVESTMENTS WAS WITH AN INTENTION OF A TRADE, C ANNOT BE ACCEPTED. 10. IN ANY CASE, IN SO FAR AS THE VERY NATURE OF DISCRETIONARY PORTFLIO MANAGEMENT SCHEME IS CONCERN ED, THE SAME HAS ALREADY 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 F OR AN ACTIVITY OF WEALTH MAXIMIZATION RATHER THAN PROFIT MAXIMIZATION AND ACCORDINGLY, IT HAS BEEN HELD THAT GAIN FROM SUCH ACTIVITY WAS LIABLE TO BE CONSIDERED AS D ERIVED FROM AN ACTIVITY OF INVESTMENTS AND NOT TRADING. THEREFORE, ON THIS ASPECT OF THE CONTROVERSY, WE FI ND THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) MADE NO MISTAKE IN FOLLOWING THE ORDER OF THE TRIBUNAL IN T HE CASE OF ARA TRADING AND INVESTMENT P. LTD. AND KRA HOLDI NG AND TRADING P. LTD (SUPRA) AND IN HOLDING THAT THE ASSESSEE WAS INDEED ENGAGED IN AN INVESTMENT ACTIVI TY WHILE APPOINTING THE PMS PROVIDER WITH REGARD TO TH E 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 INCOM E- TAX (APPEALS) IN PARA 4.20 OF THE IMPUGNED ORDER, W HICH IS AS UNDER: 5 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 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 W AS EMPHASIZED THAT THE TOTAL SALES TURNOVER IN THE INV ESTMENTS MADE THROUGH PMS DURING THE YEAR WAS 19.06 CRORES INVOLVING 62 SCRIPTS, WHEREAS, IN THE SHARE TRADING BUSINESS SEPARATELY SHOWN BY THE APPELLANT, THE SALES TURNOV ER WAS 73.21 CRORES INVOLVING 76 SCRIPTS. THIS SHOWS THAT IN THE SHARE TRADING BUSINESS ACTIVITY, THE TURNOVER WAS A LMOST 4 TIMES HIGHER EVEN THOUGH THE NUMBER OF SCRIPTS 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 ACTIVI TY, THE SAME WAS SHOWN UNDER THE HEAD BUSINESS INCOME. IT ALSO INCLUDED SPECULATIVE TRANSACTION AND DAY TRADING, W HEREAS NO SUCH TRANSACTIONS WERE ENTERED INTO BY THE PMS. THE APPELLANT HAS ALSO EMPHASIZED THAT IT WAS PRUDENT INVESTMENT ACTIVITY OF THE PMS TO BUY A TARGET QUAN TITY OF 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 J ANAK 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 HELD THE SHARES AS INVESTMENT AND NOT AS STOCK IN TRADE. SIMILAR EX PLANATION 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 EXTRACTED PORTION WITH REFERENCE TO THE STAT EMENT AND TRANSACTIONS WHICH HAVE BEEN PLACED N THE PAPER BOOK FILED BEFORE US. IN OUR CONSIDERED OPINION, TH E INFERENCE DRAWN OUT BY THE COMMISSIONER OF INCOME-T AX (APPEALS) CLEARLY ESTABLISHES THAT THE VOLUME AND FREQUENCY OF TRANSACTIONS SOUGHT TO BE MADE OUT BY THE ASSESSING OFFICER WITH REGARD TO THE IMPUGNED ACTIV ITY STANDS ON AN ENTIRELY DIFFERENT FOOTING AND IS QUIT E DISTINCT FROM THE ACTIVITY OF TRADING IN SHARES CAR RIED 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 ACTIVIT IES AND THAT IN THE CASE OF A PMS PROVIDER, SUCH ACTIVITIES ARE PROHIBITED IN LAW. HAVING REGARD TO THE AFORESAID DISCUSSION BY THE COMMISSIONER OF INCOME-TAX (APPEALS), WHICH IS BORNE OUT OF THE RECORD, WE, THEREFORE, FIND NO REASONS TO UPHOLD THE PLEA OF TH E 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 S UCH TRANSACTIONS, BECAUSE THE SHARES HAVE BEEN SOLD JUS T BEFORE THE SAME BECAME EX-DIVIDEND ON THE STOCK EXCHANGES. IN THIS REGARD, WE FIND THAT THE COMMISS IONER OF INCOME-TAX (APPEALS) HAS FACTUALLY FOUND THE SAM E TO BE CONTRARY TO MATERIAL ON RECORD AS PER THE DISCUS SION IN PARA 4.15 OF THE ORDER, WHICH IS AS UNDER: 6 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 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 TH E DIVIDEND 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 DATES 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- DIVIDEND. COMING TO TWO MORE INSTANCES POINTED OUT BY THE 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 SALE OF ONGC SHARES BY DSPML WAS MADE ON 30.12.2005, WHICH ALSO IS AFTER THE EX-DIVI DEND 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 SA LE HAS BEEN MADE JUST BEFORE THE SHARES BECOMING EX-DIVIDE ND; AND THERE WAS A POSSIBILITY THAT THE DIVIDEND WOULD HAVE BEEN DECLARED AND KNOWN TO THE PMS. HOWEVER, SUCH INSTANCES ARE FEW AND FAR BETWEEN; AND IT CANNOT LE AD TO A CONCLUSION OF INDULGING IN A BUSINESS ACTIVITY. MOR EOVER, AS HAS BEEN EXPLAINED ELSEWHERE BY THE APPELLANT, SUCH DAY TO DAY DECISIONS REGARDING PURCHASE AND SALE OF PARTIC ULAR SCRIPTS ARE NOT THAT OF THE APPELLANT, BUT OF THE P ORTFOLIO MANAGER SINCE THE APPELLANTS CASE WAS THAT OF ENGA GEMENT OF DISCRETIONARY PORTFOLIO MANAGEMENT SERVICES. IT WAS EXPLAINED THAT AS PER SEBI REGULATIONS, THERE WERE TWO TYPES OF PMSS I.E. DISCRETIONARY AND NON-DISCRETION ARY. IT WAS EXPLAINED THAT IN CASE OF DISCRETIONARY PMS AS AVAILED BY THE APPELLANT, HE APPELLANT DID NOT HAVE CONTROL ON THE DAY TO DAY ACTIVITIES AND DID NOT GIVE ANY DIRECTIO NS, EXCEPT FOR THE BROAD GUIDELINE FOR NOT PURCHASING THE SHAR ES OF PATNI COMPUTERS SYSTEMS LTD. SINCE IT WAS PROMOTED BY THE APPELLANT AND HIS FAMILY MEMBERS. IT WAS ALSO EXPLA INED DURING THE APPELLATE 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/- WA S ALSO EARNED DURING THE YEAR IN THE INVESTMENTS THROUGH T HE 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 AN D PURCHASES CARRIED OUT BY THE PMS PROVIDER WAS OF SH ORT- TERM NATURE AND, THEREFORE, IT WAS TO BE REGARDED A S A BUSINESS ACTIVITY. FACTUALLY SPEAKING, ON THIS ASPE CT THE 7 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 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 THERE 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 TREATED 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 M ORE THAN 12 MONTHS ALSO AS BUSINESS INCOME. QUITE CLEAR LY AS PER THE STATEMENT IN RESPECT OF GAINS AND INVEST MENT IN SHARES THROUGH PMS PROVIDER PLACED AT PAGE 73 OF THE PAPER BOOK, THE HOLDING PERIOD GOES UPTO EVEN 18 MONTHS BEFORE THE INVESTMENT WAS LIQUIDATED. BE THA T AS IT MAY, THE FACTOR OF PERIOD OF HOLDING CANNOT BE A SCRIBED TO THE ASSESSEE, INASMUCH AS IT HAS NO CONTROL ON S UCH DECISION MAKING IN A DISCRETIONARY PMS ARRANGEMENT, BECAUSE SUCH DECISIONS ARE TAKEN BY THE PMS PROVIDE R AS WE HAVE OBSERVED EARLIER. IN ANY CASE, IN SO FAR AS THE PRESENT CASE IS CONCERNED, THE INVESTMENT OBJEC TIVE OF THE ASSESSEE MANDATED TO THE PMS PROVIDER WAS TO ACHIEVE GROWTH PROSPECTS AND THE ACTUALITY OF TRANSACTIONS CARRIED OUT BY THE PMS PROVIDER IN ORD ER TO ACHIEVE THE STATED INVESTMENT OBJECTIVE OF THE ASSE SSEE CANNOT BE MADE A BASIS TO CHARGE THE ASSESSEE OF HAVING A DIFFERENT OBJECTIVE. CONSIDERING THE AFORE SAID MATTERS, WE, THEREFORE, ARE OF THE VIEW THAT THE OBJECTIONS MADE OUT BY THE ASSESSING OFFICER HAVE B EEN ADEQUATELY ADDRESSED BY THE COMMISSIONER OF INCOME- TAX (APPEALS) IN COMING TO HIS FINDINGS THAT THE INVESTMENTS 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 COMMISSION ER OF INCOME-TAX (APPEALS) WITH WHICH WE HEREBY AFFIRM , WE FIND THAT THE GRIEVANCE OF THE REVENUE IN THIS APPE AL IS MISDIRECTED AND ACCORDINGLY THE CONCLUSION ARRIVED AT BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON THIS ASPECT IS HEREBY AFFIRMED. THUS, ON THIS GROUND, REVENUE FAILS. 8 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08 9. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE RESPONDENT-ASSESSEE POINTED OUT THAT THE CIT(A) HAS CONSIDERED THE EARLIER DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ARA TRADING AND INVESTMENT PVT. LTD. IN ITA NO. 499/PBN /2008 AND KRA HOLDING AND TRADING PVT. LTD. IN ITA NO. 500/PN/200 8 DATED 31-8- 2009 FOR A.Y. 2004-05 IN COMING TO THE CONCLUSION T HAT THE IMPUGNED GAIN WAS LIABLE TO BE ASSESSED UNDER THE HEAD CAPI TAL GAIN. THE LEARNED DR APPEARING FOR THE REVENUE HAS NOT DISPUT ED THE FACTUAL MATRIX THAT THE ISSUE RAISED IN THIS APPEAL IS COVE RED BY THE AFORESAID PRECEDENTS. 10. IN VIEW OF THE AFORESAID DISCUSSION, WE HEREBY AFFIRM THE ORDER OF CIT(A) AND REJECT THE GROUND RAISED BY THE REVEN UE FOR THE YEAR UNDER CONSIDERATION. ITA NO. 634/PN/2011 FOR A.Y. 2007-08 11. THE FACTS OF THIS CASE ARE IDENTICAL TO THOSE F OR THE A.Y. 2006- 07. FOLLOWING THE REASONING GIVEN WHILE DEALING WI TH THE APPEAL FOR A.Y. 2006-07, WE HEREBY AFFIRM THE ORDER OF CIT(A) AND REJECT THE GROUND RAISED BY THE REVENUE FOR THIS YEAR AS WELL. 12. IN THE RESULT, APPEALS OF THE REVENUE ARE DISMI SSED. DECISION PRONOUNCED IN THE OPEN COURT ON 20 TH NOVEMBER 2012. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 20 TH NOVEMBER 2012 ANKAM COPY TO:- 1. ASSESSEE 2. DEPARTMENT 3. THE CIT (A) II PUNE 4. THE CIT- II PUNE 5. THE DEPARTMENTAL REPRESENTATIVE, B BENCH, I.T. A.T., PUNE. BY ORDER //TRUE COPY// SR. P.S. I.T.A.T., PUNE 9 ITA NO. 633 & 634/PN/2011 ATUL J. KHANNA A.Y. 2006-07 & 2007-08