SHUBHYOG TRADER, MUMBAI V. ASST CIT 14(1), MUMBAI

ITA 7134/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 83645 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 17-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 21-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADAGIRI
• Assessee Lawyers: MEGHA BANSAL
• Keywords: Business income; Source of fund
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI SANJAY GARG, J M ITA NO. 7134 / MUM/20 1 1 ( ASSESSMENT YEAR : 200 8 - 0 9 ) M/S SHUBHYOG TRADER, 1 ST FLOOR, STANDARD HOUSE, 83, M.K.ROAD, MUMBAI - 400 002 VS. ACIT - 14, MUMBAI PAN/GIR NO. : A A MFS 8548 R ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI PRAKASH SHAH , & MEGHA BANSAL /REVENUE BY : SHRI B. YADAGIRI DATE OF HEARING : 2 3 RD JULY , 201 4 DATE OF PRONOUNCEMENT : 28 TH AUG, 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER CIT(A ) , DATED 22 - 9 - 2011 FOR THE ASSESSMENT YEAR 200 8 - 0 9 , IN THE MATTER OF ORDER PASSED U/S. 143(3) OF TH E ACT , WHEREIN FOLLOWING GROU NDS HAVE BEEN TAKEN : - 1. IT IS SUBMITTED THAT THE LEARNED .COMMISSIONER OF INCOME TAX (APPEALS) COMMITTED A GRAVE ERROR OF LAW IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER THAT THE PROFIT AND GAIN EARNED BY THE APPELLANTS FROM THE ACTIVITY CARRIED OU T PMS MANAGERS IS TAXABLE UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION' 2. IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE PURPORTED FINDINGS OF BOTH THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND THE LEARNED ASSES SING OFFICER THAT PROFIT AND GAINS EARNED BY THE APPELLANTS IS BUSINESS INCOME IS BASED ON NO MATERIAL AND EX - FACIE UNTENABLE AND UNSUSTAINABLE BOTH IN FACTS AND ITA NO. 7134 /1 1 2 LAW AND CONTRARY TO THE LAW DECLARED BY THE HON 'BLE HIGH COURT OF BOMBAY IN THE CASE OF GOPAL PUROHIT. 3. IT IS SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) COMMITTED A GRAVE ERROR OF LAW IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER HOLDING THAT THE DIVIDEND RECEIVED BY THE APPELLANT FROM PMS IS ALSO RECEIPT WHICH IS INCIDE NTAL TO HIS BUSINESS. 4. IT IS SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT WHETHER THE ACTIVITIES CARRIED OUT BY THE FIRM, BE NAMED AS 'INVESTMENT IN SHARES' OR OTHERWISE ARE PART OF BUSINESS ACTIVITIES TO BE CAR RIED OUT BY THE FIRM AS PER SECTION 4 OF THE PARTNERSHIP ACT, 1932 AS WELL THE DEED OF PARTNERSHIP THEREBY SUGGESTING THAT EVERY INCOME THE FIRM IS BUSINESS INCOME. TREATING LONG TERM CAPITAL GAINS OF RS. 43,57,622/ - AND SHORT TERM CAPITAL GAINS OF RS. 3 0,45,835/ - AS BUSINESS INCOME. 5. IT IS SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER THAT THE APPELLANT WAS A DEALER IN SHARES AND THEREFORE THEIR INCOME FROM THIS ACTIVITY WAS ASS ESSABLE UNDER THE HEAD 'PROFITS AND GAINS FROM BUSINESS' AND NOT UNDER THE HEAD 'CAPITAL GAINS' AS CONTENDED BY THE APPELLANT. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THE FACT THAT THE APPELLANTS INVESTED IN SHARES THROUG H PMS AND THE FREQUENCY OF TRANSACTIONS ARE ENTIRELY IRRELEVANT AND THAT DELIVERY OF SHARES WERE DULY TAKEN BY THE APPELLANTS AND PROFITS EARNED BY THE APPELLANTS ARE SUBJECT TO THE CAPITAL GAINS EITHER LONG TERM OR THE SHORT TERMS AS THE CASE MAY BE. 7. IT IS SUBMITTED THAT BOTH THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AND THE LEARNED ASSESSING OFFICER DID NOT DISPUTE THAT THE APPELLANTS HAS PURCHASED AND ACQUIRED SHARES AND HELD THEM IN THEIR NAME IN THEIR DEMAT ACCOUNT AS OWNERS THEREOF. 8. T HE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN RELYING UPON THE ORDER OF THIS HORR'BLE ITAT IN THE CASE OF SMT. SADHANA NABARA VS. ACIT. THE FACTS IN THE PRESENT CASE ARE DIFFERENT FROM THE FACTS IN THE CASE SMT. SADHANA NABARA. 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE SHARES PURCHASED BY THE APPELLANTS WERE SHOWN AS INVESTMENT IN THE BOOKS OF ACCOUNTS OF THE APPELLANTS. DIVIDEND INCOME TAXED AS BUSINESS INCOME RS. 2,00,477/ - 10. THE LEARNED COMMISSIO NER OF INCOME TAX (APPEALS) ERRED IN TAXING THE DIVIDEND INCOME OF RS. 2,00,477/ - AS BUSINESS INCOME IN SPITE OF THE FACT THAT THE DIVIDEND INCOME IS SPECIFICALLY EXEMPT U/S ITA NO. 7134 /1 1 3 10 (34) OF THE ACT IRRESPECTIVE OF WHETHER THE SAME IS RECEIVED AS AN INVESTOR IN SHARES OR DEALER IN SHARES AND HENCE THE DIVIDEND INCOME TAXED AS BUSINESS INCOME IS WITHOUT ANY JUSTIFICATION AND LIABLE TO BE DELETED. 2 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT ASSESSEE WAS INVESTING IN SHARES TH ROUGH PORTFOLIO MANAGEMENT SCHEME (HEREINAFTER REFERRED TO AS PMS) . DURING THE YEAR UNDER CONSIDERATION, ASSESSEE EARNED LONG TERM CAPITAL GAIN OF RS. 43,57,622/ - AND SHORT TERM CAPITAL GAIN OF RS. 30,45, 835/ - , WHICH WAS TREATED BY THE AO AS BUSINESS INCOM E HOLDING THAT ASSESSEE IS A TRADER IN SHARES AND NOT AN INVESTOR ON THE GROUND THAT ASSESSEE IS A PARTNERSHIP FIRM CARRYING ON SHARE TRADING ACTIVITY THROUGH PMS. THE AO OBSERVED THAT ASSESSEE HAS UTILIZED SERVICES OF ASK INVESTMENT MANAGERS PVT. LTD. AND ALCHEMY CAPITAL MANAGEMENT PVT. LTD., WHICH ARE PORTFOLIO MANAGERS. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE INCOME OFFERED UNDER THE HEAD 'SHORT TERM CAPITAL GAINS' SHOULD NOT BE TREATED AS BUSINESS INCOME. IN HIS REPLY DATED 24/11/2010 THE AR HAS FURNISHED THE FOLLOWING EXPLANATION: 1 . OUR ASSESSEE IS AN INVESTOR IN EQUITY SHARES AND MUTUAL FUNDS FOR MORE THAN THREE YEARS, 2. OUR ASSESSEE HAS GIVEN A SUM OF RUPEES TO ASK INVESTMENT MANAGERS PVT LTD ON 16/12/2005 AND TO ALCHEMY CAPITAL MANAGEMENT PVT LTD ON 21/12/2005 AS PMS. THEY ARE MANAGING THE INVESTMENTS ILL SHARES. 3. ASSESSEE HAS SHOWN INVESTMENT IN SHARES OF RS.1,22,90,071/ - IN THE AY 2006 - 07 AND THE SAME IS ACCEPTED BY THE LEARNED ITO AS A INVESTOR, SCRUTINY ORDER IS ATTACHED. IN AY 200 6 - 07 THERE WAS A SHORT TERM CAPITAL LOSS OF RS. 18,828 / - AND T HE SAME IS NOT C/F AS THE RETURN IS FILED LATE. 4. IN THE AY 2007 - 08 THERE WAS A SHORT TERM CAPITAL GAIN OF RS. 6,78,172/ - AND INVESTMENT IN SHARES OF RS. 1,46, 68 ,799/ - AND THE SAME IS ACCEPTED U/ S 143(1). 5. IN THE AY 2008 - 09 THERE IS A SHORT TERM CAPITAL GAIN OF RS. 30,16,243/ - . AS LOOKING TO THE DETAILS OF SHORT TERM GAIN THE ITA NO. 7134 /1 1 4 SHARES ARE HELD FOR MORE THAN 5 TO 6 MONTHS AND THE SA ME ARE REFLECTED IN THE DEMAT A/ C OF TH E P MS. 6. ASSESSEE IS INVE STING IN SHARES AND MF'S THROUGH PMS ONLY. 7. IN THE AY 2008 - 09 ASSESSEE HAD WITHDRAWN ALL THE MONEY FROM PMS AND INVESTED IN BANK FD. 8. WE ALSO RELY ON BOMBAY HIGH COURT JUDGEMENT I.E., C I T VS GOPAL PUROHIT AND HENCE KINDLY ACCEPT RS. 30,16,243/ - AS SHORT TERM CAPITAL GAIN. THE AO OBSERVED THAT INTENTION OF THE ASSESSEE BEHIND CONSTITUTION OF PARTNERSHIP IS TO COME TOGETHER AND MAKE PROFIT S . ACCORDINGLY, THE AO CONCLUDED THAT ASSESSEE HAS INVESTED HUGE FUNDS WITH PMS OPERATIONS WITH SOLE INTENTION T O RESALE THE SHARES TRADING THROUGH PMS OPERATORS. BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ACTION OF THE AO. HENCE, ASSESSEE IS FURTHER APPEAL BEFORE US. 3 . LEARNED AR RELIED ON THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF RADIALS INTERNATI ONAL VS. ACIT, PASSED IN ITA NO. 485/2012, VIDE ORDER DATED 25 - 4 - 2014 , WHEREIN UNDER SIMILAR FACTS AND CIRCUMSTANCES , PROFIT EARNED ON SALE OF EQUITY SHARES UNDER PORTFOLIO MANAGEMENT SCHEME WAS HELD TO BE ASSESSABLE AS CAPITAL GAINS. OUR ATTENTION WAS INVI TED TO THE RELEVANT OBSERVATIONS OF THE HO NBLE HIGH COURT . 4 . WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FUND FROM THE RECORD THAT ASSESSEE IS AN INVESTOR IN EQUITY SHARES AND MUTUAL FUNDS SINCE MO RE THAN LAST 3 YEARS. FUNDS WERE GIVEN BY ASSESSEE TO INVESTMENT MANAGERS, WHO ARE MANAGING THE INVESTMENTS IN SHARES AND MUTUAL FUNDS. THE STAND OF THE ASSESSEE THAT SHARES ARE HELD AS INVESTMENTS AND PROFIT EARNED THEREON IS LIABLE TO TAX UNDER CAPITAL G AIN TAX AND WAS NOT AS BUSINESS PROFIT WAS ITA NO. 7134 /1 1 5 ACCEPTED BY THE DEPARTMENT IN SCRUTINY ASSESSMENT FOR THE ASSESSMENT YEAR 2006 - 07. IN THE A.Y. 2007 - 08, THE SHORT TERM CAPITAL GAIN OF RS. 6,78,172/ - AND INVESTMENT OF RS. 1,46,68,799/ - WAS ACCEPTED BY THE AO U/S. 14 3(1). HOWEVER, DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE SOLD SHARE AFTER BEING ENTERED IN THE DEMAT ACCOUNT OF PMS, THE PROFIT OF WHICH WAS TREATED BY THE AO AS BUSINESS INCOME. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE IS INVESTING IN SHARES I N MUTUAL FUNDS THROUGH PMS ONLY AFTER SELLING THE SHARES ASSESSEE HAS WITHDRAWN ALL THE MONEY IN THE PMS AND INVESTED IN THE BANK FD. THE QUESTION A S TO WHETHER PROFIT EARNED ON SALE OF EQUITY SHARE UNDER PORTFOLIO MANAGEMENT SCHEME WAS ASSESSABLE AS CAPIT AL GAINS, HAS BEEN DEALT BY THE HONBLE DELHI HIGH COURT IN THE CASE OF RADIALS INTERNATIONAL (SUPRA) , WHEREIN RELEVANT OBSERVATION OF THE HONBLE HIGH COURT WAS AS UNDER : - 8. THIS COURT HAS CONSIDERED THE SUBMISSIONS OF BOTH PARTIES. AT THE OUTSET, IT W OULD BE PERTINENT TO NOTE SOME OF THE RELEVANT TERMS OF THE PMS AGREEMENT. CLAUSES 7(B) AND 7 (C) OF THE PMS AGREEMENT BETWEEN RADIAL AND KOTAK SECURITIES LTD. INDICATE THAT ONLY IN A DISCRETIONARY PORTFOLIO, UNLIKE IN A NON - DISCRETIONARY PORTFOLIO, THE MA NAGER HAS FULL DISCRETION TO INVEST IN RESPECT OF THE CLIENTS ACCOUNT IN ANY TYPE OF SECURITY, AND MAKE SUCH CHANGES IN THE INVESTMENTS AS HE DEEMS FIT. CLAUSE 18 (B) OF THE AGREEMENT STATES THAT THE MANAGER SHALL NOT BE RESPONSIBLE FOR ANY LOSS OR EXP ENSES RESULTING TO ONE PERSON AS CLIENT, FROM THE INSUFFICIENT OR DEFICIENCY OF VALUE OF OR TITLE TO ANY PROPERTY OR SECURITY ACQUIRED OR TAKEN ON BEHALF OF THE CLIENT. WHILE THE AGREEMENT ENTERED INTO BETWEEN RADIAL AND RELIANCE APPEARS TO BE A DISCRETI ONARY PORTFOLIO, AS INDICATED IN CLAUSE 9 (BY WHICH CLIENT UNCONDITIONALLY AND IRREVOCABLY GRANTS POWER OF ATTORNEY TO THE PORTFOLIO MANAGER TO MAKE DECISIONS ON THE INVESTMENTS), CLAUSE 10 STATES THAT THE PORTFOLIO MANAGER PROVIDES NO WARRANTY AS TO THE APPRECIATION OF THE SECURITIES IN WHICH HE APPLIES THE CLIENTS FUNDS. THEREFORE, IT IS CLEAR THAT A PMS AGREEMENT CAN BE AN INSTRUMENT BY COMPLETE AUTHORITY AND DISCRETION OVER THE TRANSACTIONS TO BE ENTERED INTO, IS SURRENDERED TO THE PORTFOLIO MANAGER BY THE INVESTOR. ITA NO. 7134 /1 1 6 9. FROM THE TERMS OF THE AGREEMENT IT DOES NOT EMERGE THAT THE INTENTION OF THE INVESTORIS TO MAKE PROFITS. THE TERMS ON THE OTHER HAND, INDICATE THAT REGARDLESS OF THE LEVEL OF DISCRETION HANDED OVER TO THE PORTFOLIO MANAGER, THERE IS N EITHER ANY GUARANTEE THAT THE SECURITIES INVESTED IN WILL APPRECIATE NOR IS THE PORTFOLIO MANAGER RESPONSIBLE TO THE CLIENT FOR ANY LOSS FROM THE DEFICIENCY OF VALUE OF THE SECURITIES. THUS, THE PMS AGREEMENT AT BEST, EMBODIES THE INTENTION TO APPOINT AN A GENT WITH LIMITED LIABILITY, WHO WILL INVEST ON BEHALF OF THE INVESTOR AND NOTHING MORE. 10. THE LD. ITAT REASONS THAT AT THE TIME OF DEPOSIT OF AMOUNT, THE INTENTION OF THE ASSESSEE WAS TO MAXIMIZE THE PROFIT BECAUSE FIRST, WHILE THE ASSESSEE ENTERS THE PMS AS INVESTMENTS IN THE BOOKS OF ACCOUNT AT THE TIME OF DEPOSITING THE MONEY, THE ASSESSEE DOES NOT KNOW WHAT SPECIFIC TRANSACTIONS WILL BE ENTERED INTO BY THE MANAGER, SECOND, THAT THE ASSESSEE FINDS OUT THE DETAILS OF THE TRANSACTIONS ONLY AFTER TH REE MONTHS HAVE EXPIRED AND, ONLY AT THE END OF THE YEAR CAN THE SHARES IN THE DEMAT ACCOUNT BE ENTERED INTO THE BOOKS OF ACCOUNT, THIRD, THE ASSESSEE HAS NO CONTROL OVER THE SHARES BOUGHT OR SOLD UNDER THE PMS AND THUS THE PORTFOLIO MANAGER ENTERS INTO TR ANSACTIONS ON BEHALF OF HIS CLIENTS TO MAXIMIZE PROFITS. FROM THIS, THE ITAT INFERS THAT IT CANNOT BE SAID THAT THE ASSESSEE HAD INVESTED MONEY UNDER PMS WITH INTENTION TO HOLD SHARES AS INVESTMENT. THE REASONING OF THE LD. ITAT DOES NOT FIND FAVOUR WITH THIS COURT FOR THREE REASONS. 11. FIRST, THE THREE REASONS PROVIDED BY THE ITAT MERELY CONVEY THAT INTENTION TO HOLD SHARES AS INVESTMENT CANNOT BE INFERRED FROM THE AGREEMENT. HOWEVER, THE FACT THAT NO INFERENCE OF AN INTENTION TO INVEST CAN BE MADE FRO M THE AGREEMENT DOES NOT TRANSLATE TO THE INTENTION TO TRADE IN SHARES FOR PROFIT EITHER. AS WAS NOTED IN RAJA BAHADUR KAMAKHYANARAIN SINGH V. CIT - BIHAR, (1969)3SCC791 =(1970) 77 ITR 253 (SC) : THE SURPLUS REALISED ON THE SALE OF SHARES, FOR INSTANCE, WO ULD BE CAPITAL IF THE ASSESSEE IS AN ORDINARY INVESTOR REALISING HIS HOLDING; BUT IT WOULD BE REVENUE, IF HE DEALS WITH THEM AS AN ADVENTURE IN THE NATURE OF TRADE. THE FACT THAT THE ORIGINAL PURCHASE WAS MADE WITH THE INTENTION TO RESELL IF AN ENHANCED PR ICE COULD BE OBTAINED IS BY ITSELF NOT ENOUGH BUT, IN CONJUNCTION WITH THE CONDUCT OF THE ASSESSEE AND OTHER CIRCUMSTANCES, IT MAY POINT TO THE TRADING CHARACTER OF THE TRANSACTION. FOR INSTANCE, AN ASSESSEE MAY INVEST HIS CAPITAL IN SHARES WITH THE INTENT ION TO RE - SELL THEM IF IN FUTURE THEIR SALE MAY BRING IN HIGHER PRICE. SUCH AN INVESTMENT, THOUGH MOTIVATED BY A POSSIBILITY OF ENHANCED VALUE, DOES NOT RENDER THE INVESTMENT A TRANSACTION IN THE NATURE OF TRADE. 12. AS INDICATED HERE, WHILE A TRANSACTION MAY BE MOTIVATED BY THE INTENTION TO RESELL AT AN ENHANCED VALUE, IT WOULD NOT BE POSSIBLE TO EVALUATE WHETHER THE TRANSACTION WAS ACTUALLY IN THE NATURE OF TRADE, ITA NO. 7134 /1 1 7 UNTIL THE SECURITIES ARE ACTUALLY RESOLD. MOREOVER, IN A DISCRETIONARY PMS, IT BECOMES ALL THE MORE RELEVANT AND NECESSARY TO EVALUATE THE INTENTION OF THE ASSESSEE IN CONJUNCTION WITH HIS CONDUCT AND OTHER CIRCUMSTANCES, SINCE THE INTENTION OF THE ASSESSEE CANNOT BE ASCERTAINED AT THE TIME OF DEPOSITING THE MONEY IN THE INVESTMENT, BECAUSE THE ACTUAL SALE AND PURCHASE OF SECURITIES HAPPENS AT THE HANDS OF THE PORTFOLIO MANAGER, A MERE AGENT. 13. SECOND, SINCE THE INTENTION OF THE ASSESSEE CANNOT BE ASCERTAINED, AND THE INVESTMENTS ARE MADE BY THE PORTFOLIO MANAGER WITHOUT THE KNOWLEDGE OF THE ASSESSEE/INVESTOR IN A DISCRETIONARY PMS, THE MANNER IN WHICH THE SECURITIES HAVE BEEN TREATED BY THE ASSESSEE CAN AND OUGHT TO BE EVALUATED ONLY POST THE FACT OF INVESTMENT, AND NOT AT THE TIME OF DEPOSITING THE MONEY. THIS PROPOSITION IS SUPPORTED BY THE JUDGMENT OF THE SUPREME COURT REPORTED AS CIT - CALCUTTA V. ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY, AIR 1972 SC 445 = (1971) 82 ITR 586 (SC), IN WHICH IT WAS HELD THAT: IT WAS OPEN TO THE ASSESSEE TO CONTEND THAT EVEN ON THE ASSUMPTION THAT IT HAD BEC OME A DEALER AND WAS NO LONGER AN INVESTOR IN SHARES THE PARTICULAR HOLDINGS WHICH HAD BEEN CLEARED AND THE SALES OF WHICH HAD RESULTED IN THE PROFIT IN QUESTION HAD ALWAYS BEEN TREATED BY IT AS AN INVESTMENT. IT CAN HARDLY BE DISPUTED THAT THERE WAS NO BA R TO A DEALER INVESTING IN SHARES. BUT THEN THE MATTER DOES NOT REST PURELY ON THE TECHNICAL QUESTION OF ONUS WHICH UNDOUBTEDLY IS INITIALLY ON THE REVENUE TO PROVE THAT A PARTICULAR ITEM OF RECEIPT IS TAXABLE. WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK - IN - TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE, OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAI NED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK - IN - TRADE AND THOSE WHICH ARE HELD BY WAY OF INVESTMENT. THE ASSESSEE CAN ONLY SHOW THAT THE HOLDINGS IN QUESTION WERE ALWAYS TREATED AS AN INVESTMENT (DESPITE HAVING MADE A PROFIT ON CLEARING THE M) POST THE FACT OF INVESTMENT. IT WOULD ALSO BE NECESSARY TO ACKNOWLEDGE THAT THE CHARACTERIZATION OF A TRANSACTION, I.E AS A PORTFOLIO MANAGEMENT SCHEME OR INVESTMENT, ITSELF IS NOT DETERMINATIVE. IT IS SETTLED LAW THAT NOMENCLATURE OF A DOCUMENT OR DEED IS NOT CONCLUSIVE OF WHAT IT SEEKS TO ACHIEVE; THE COURT HAS TO CONSIDER ALL PARTS OF IT, AND ARRIVE AT A FINDING IN REGARD TO ITS TRUE EFFECT (REF. PUZHAKKAL KUTTAPPU V. C. BHARGAVI & ORS AIR 1977 SC 105 AND FAQIR CHAND GULATI, APPELLANT(S) V. UPPAL AGEN CIES PVT. LTD2008 (10) SCC 345). IN THE INCOME TAX LAW, THE POSITION IS NO DIFFERENT, AS CAN BE SEEN FROM THE JUDGMENT OF THE SUPREME COURT IN CIT VS. MOTORS & GENERAL STORES (P) LTD. (1967) 66 ITR 692 (SC), FOLLOWING DUKE OF WESTMINISTER (1935) 19 TAX CAS . 490 AND COMMISSIONER OF INLAND REVENUE VS. WESLEYAN & GENERAL ASSURANCE SOCIETY (1948) 16 ITR (SUPP.) 101. ITA NO. 7134 /1 1 8 14. LASTLY, THE WAY IN WHICH THE TESTS ARE TO BE APPLIED WAS MADE CLEAR IN THE CBDT CIRCULAR NO. 4 OF 2007, WHICH STATES: 8. THE AUTHORITY FOR A DVANCE RULINGS(AAR) (288 ITR 641), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES, HAS CULLED OUT THE FOLLOWING PRINCIPLES : - (I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK - IN - TRADE AND THAT EXISTENCE OF THE POWER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF ASSOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSACTION; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MANNER OF MAINTAINING BOOKS OF ACCOUNTS, THE MAGNITUDE OF PURCHASES AND SALE S AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD FURNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; (III) ORDINARILY THE PURCHASE AND SALE OF SHARES WITH THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION BEING IN T HE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE BUT WHERE THE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC. THEN THE PROFITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT. 11. ASSESSING OFFICERS ARE ADVISED THAT THE ABOVE PRINCIPLES SHOULD GUIDE THEM IN DETERMINING WHETHER, IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GAINS) OR AS STOCK - IN - TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASSESSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER, IN A GIVEN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT OR STOCK - IN - TRADE. 15. IT WAS ALSO HELD IN P.M. MOHAMMED MEERAKHAN V CIT - KERALA, (1969)2SCC25 = (1969) 73 ITR 735 (SC) : IT IS NOT POSSIBLE TO EVOLVE ANY SINGLE LEGAL TEST OR FORMULA WHICH CAN BE APPLIED IN DETERM INING WHETHER A TRANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE OR NOT. THE ANSWER TO THE QUESTION MUST NECESSARILY DEPEND INEACH CASE ON THE TOTAL IMPRESSION AND EFFECT OF ALL THE RELEVANT FACTORS AND CIRCUMSTANCES PROVED THEREIN AND WHICH DETERMINE TH E CHARACTER OF THE TRANSACTION.. 16. THEREFORE, IT IS LEGALLY UNTENABLE TO FOCUS SINGULARLY ON THE INTENTION OR MOTIVE OF THE ASSESSEE WITHOUT LOOKING AT THE SUBSTANTIAL NATURE OF THE TRANSACTIONS, IN TERMS OF THEIR FREQUENCY, VOLUME, ETC. 17. THIS COUR T THUS CONCLUDES THAT: ITA NO. 7134 /1 1 9 A. THE PMS AGREEMENT IN THIS CASE WAS A MERE AGREEMENT OF AGENCY AND CANNOT BE USED TO INFER ANY INTENTION TO MAKE PROFIT B. THE INTENTION OF AN ASSESSEE MUST BE INFERRED HOLISTICALLY, FROM THE CONDUCT OF THE ASSESSEE, THE CIRCUMST ANCES OF THE TRANSACTIONS, AND NOT JUST FROM THE SEEMING MOTIVE AT THE TIME OF DEPOSITING THE MONEY C. ALONG WITH THE INTENTION OF THE ASSESSEE, OTHER CRUCIAL FACTORS LIKE THE SUBSTANTIAL NATURE OF THE TRANSACTIONS, FREQUENCY, VOLUME ETC. MUST BE TAKEN INT O ACCOUNT TO EVALUATE WHETHER THE TRANSACTIONS ARE ADVENTURE IN THE NATURE OF TRADE 18. THEREFORE THE BLOCK OF TRANSACTIONS ENTERED INTO BY THE PORTFOLIO MANAGER MUST BE TESTED AGAINST THE PRINCIPLES LAID DOWN, IN ORDER TO EVALUATE WHETHER THEY ARE INVES TMENTS OR ADVENTURES IN THE NATURE OF TRADE. 19. COMING TO THE FACTS OF THIS CASE, IT IS NOT CONTESTED THAT THE SOURCE OF FUNDS OF THE ASSESSEE WERE ITS OWN SURPLUS FUNDS AND NOT BORROWED FUNDS. THIS COURT NOTICES FROM ANNEXURE 4 (P. 90) THAT THE FOLLOWIN G IS THE VOLUME OF TRANSACTIONS ON THE BASIS OF HOLDING PERIOD. PERIOD OF HOLDING <90 DAYS 90 - 180 DAYS 181 - 365 DAYS >365 DAYS TOTAL QUANTITY OF SHARES 32,750 18,063 38.140 90.649 179,602 PERCENTAGE TO TOTAL QUANTITY 18.23% 10.06% 21.24% 50.47% GAIN OR LOSS 236,121.87 803,149.68 2,446,125.84 2,217,955.77 5,723,353.16 PERCENTAGE OF CG/L TO TOTAL CH/LOSS 4.12% 14.03% 43.09% 38.75% 20. IT IS CLEAR THUS, THAT ABOUT 71% OF THE TOTAL SHARES HAVE BEEN HELD FOR A PERIOD LONGER THAN 6 MONTHS, AND HAVE RESULT ED IN AN ACCRUAL OF ABOUT 81% OF THE TOTAL GAINS TO THE ASSESSEE. ONLY 18% OF THE TOTAL SHARES ARE HELD FOR A PERIOD LESS THAN 90 DAYS, RESULTING IN THE ACCRUAL OF ONLY 4% OF THE TOTAL PROFITS. THIS SHOWS THAT A LARGE VOLUME OF THE SHARES PURCHASED WERE, A S REFLECTED FROM THE HOLDING PERIOD, INTENDED TOWARDS THE END OF INVESTMENT. THIS COURT IS NOT PERSUADED BY THE ARGUMENT OF THE REVENUE THAT AN AVERAGE OF 4 - 5 TRANSACTIONS WERE MADE DAILY, AND THAT ONLY EIGHT TRANSACTIONS RESULTED IN A HOLDING PERIOD LONGE R THAN ONE YEAR. THIS IS BECAUSE THE NUMBER OF TRANSACTIONS PER DAY, AS DETERMINED BY AN AVERAGE, CANNOT BE AN ACCURATE REFLECTION OF THE HOLDING PERIOD/FREQUENCY OF TRANSACTIONS. MOREOVER, EVEN IF ONLY A SMALL NUMBER OF TRANSACTIONS RESULTED IN A HOLDING FOR A PERIOD LONGER THAN A YEAR, THE NUMBER BECOMES IRRELEVANT WHEN IT IS CLEAR THAT A SIGNIFICANT VOLUME OF SHARES WAS SOLD/PURCHASED IN THOSE TRANSACTIONS. ITA NO. 7134 /1 1 10 5 . THE HONBLE DELHI HIGH COURT IN THE CASE OF RADIALS INTERNATIONAL (SUPRA) , HAS ALSO OBSERVED T HAT INTENTION OF INVESTORS WAS NOT TO MAKE PROFIT. THE TERMS OF THE AGREEMENT SO ENTERED INTO WITH THE PORTFOLIO MANAGER INDICATE THAT REGARDLESS OF THE LEVEL OF DISCRETION HANDED OVER TO THE PORTFOLIO MANAGER, THERE IS NEITHER ANY GUARANTEE THAT THE SECUR ITIES INVESTED IN WILL APPRECIATE NOR IS THE PORTFOLIO MANAGER RESPONSIBLE TO THE CLIENT FOR NAY LOSS FROM THE DEFICIENCY OF VALUE OF THE SECURITIES. IT WAS, THEREFORE, OBSERVED THAT THE PMS AGREEMENT AT BEST, EMBODIES THE INTENTION TO APPOINT AN AGENT WIT H LIMITED LIABILITY, WHO WILL INVEST ON BEHALF OF THE INVESTOR AND NOTHING MORE. WITH REGARD TO THE REVENUES CONTENTION REGARDING ASSESSEES INTENTION TO RESELL AT AN ENHANCED VALUE, IT WAS OBSERVED BY THE HONBLE HIGH COURT THAT IT WOULD NOT BE POSSIBLE TO EVALUATE AS TO WHETHER THE TRANSACTION WAS ACTUALLY IN THE NATURE OF TRADE, UNTIL THE SECURITIES ARE ACTUALLY RESOLD. IT WAS FURTHER OBSERVED THAT IN A DISCRETIONARY PMS, IT BECOMES ALL THE MORE RELEVANT AND NECESSARY TO EVALUATE THE INTENTION OF THE A SSESSEE IN CONJUNCTION WITH HIS CONDUCT AND OTHER CIRCUMSTANCES, SINCE THE INTENTION OF THE ASSESSEE CANNOT BE ASCERTAINED AT THE TIME OF DEPOSITING THE MONEY IN THE INVESTMENT, BECAUSE THE ACTUAL SALE AND PURCHASE OF SECURITIES HAPPENS AT THE HANDS OF THE PORTFOLIO MANAGER, A MERE AGENT. IT WAS FURTHER OBSERVED THAT SINCE THE INTENTION OF THE ASSESSEE CANNOT BE ASCERTAINED, AND THE INVESTMENTS ARE MADE BY THE PORTFOLIO MANAGER WITHOUT THE KNOWLEDGE OF THE ASSESSEE/INVESTOR IN A DISCRETIONARY PMS, THE MANN ER IN WHICH ITA NO. 7134 /1 1 11 THE SECURITIES HAVE BEEN TREATED BY THE ASSESSEE CAN AND OUGHT TO BE EVALUATED ONLY POST THE FACT OF INVESTMENT, AND NOT AT THE TIME OF DEPOSITING THE MONEY. WHILE DECIDING THE ISSUE, THE HONBLE HIGH COURT HAS RELIED ON THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY, (1971) 82 ITR 586 (SC) , WHEREIN IT WAS OBSERVED THAT WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTMENT OR FORMS PART OF THE STOCK - IN - TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK - IN - TRADE AND THOSE W HICH ARE HELD BY WAY OF INVESTMENT. 6 . WE HAD ALSO GONE THROUGH THE PORTFOLIO INVESTMENT MANAGEMENT AGREEMENT ENTERED BY THE ASSESSEE, ACCORDING TO WHICH IN CASE OF PORTFOLIO MANAGEMENT SERVICES, THE PORTFOLIO MANAGER EXERCISES DISCRETION AS TO THE INVE STMENT OR THE MANAGEMENT OF THE PORTFOLIO OF SECURITIES OR THE FUNDS OF THE CLIENTS, AS THE CASE MAY BE. THUS, AS PER THE TERMS OF AGREEMENT, THE ASSESSEE HAS NO CONTROL OVER THE INVESTMENT BEING MADE BY THE PORTFOLIO INVESTOR. THE ASSESSEE PUTS HIS MONEY WITH THE PORTFOLIO MANAGER, WHO MAKES INVESTMENT AS PER THE MARKET STUDY OF THEIR TEAM OF EXPERTS. WE ALSO FOUND THAT AS PER THE TERMS, THE PORTFOLIO MANAGER DOES NOT GIVE ANY GUARANTEE OF PROFIT OR LOSS. WE ALSO FOUND THAT OUT OF TOTAL TRANSACTIONS OF 22 0 DURING THE YEAR UNDER CONSIDERATION, 65 TRANSACTIONS WAS FOR HOLDING LESS THAN 90 DAYS, ITA NO. 7134 /1 1 12 42 TRANSACTIONS WAS FOR HOLDING BETWEEN 90 - 180 DAYS, 36 TRANSACTIONS WAS HOLDING BETWEEN 181 - 365 DAYS AND 77 TRANSACTIONS WAS HOLDING FOR MORE THAN 365 DAYS. THUS, T HE PERCENTAGE TO TOTAL QUANTITY WORKS OUT TO BE 29.55 FOR LESS THAN 90 DAYS, 19.09 FOR 90 - 180 DAYS, 16.36 FOR 181 - 365 DAYS AND 35.00 FOR MORE THAN 365 DAYS. OUT OF THE TOTAL CAPITAL GAINS SO EARNED I.E. 9.52% FOR LESS THAN 90 DAYS, 11.80% FOR 90 - 180 DAYS, 24.99% FOR 181 - 365 DAYS AND 53.70 FOR MORE THAN 365 DAYS. THUS, THE SHARES OF ASSESSEE HELD UNDER PORTFOLIO MANAGEMENT SCHEME WAS SOLD AFTER HOLDING FOR REASONABLE PERIOD. 7 . IN VIEW OF THE ABOVE DISCUSSION, RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE DELHI HIGH COURT, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE AO FOR TREATING THE PROFIT ON SALE OF PORTFOLIO SHARES UNDER PORTFOLIO INVESTMENT SCHEME AS BUSINESS INCOME. 8 . WE ALSO DO NOT FIND ANY MERIT IN THE ACTION OF THE AO FOR TAXING THE DIVIDE ND INCOME AS BUSINESS INCOME. THE DIVIDEND INCOME SO EARNED IS EXEMPT U/S. 10(34) OF THE I.T. ACT. ACCORDINGLY, THE AO WAS NOT JUSTIFIED IN TAXING THE DIVIDEND INCOME AS INCOME FROM BUSINESS AND PROFESSION. 9 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28/08/ 201 4 . 28/08/ 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 28/08 /2014 /PKM , PS ITA NO. 7134 /1 1 13 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) , MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//