TMI Blog2009 (8) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in disposal we have consolidates the two, heard together and hereby decided by this common order as hereunder. 2. As suggested by the parties appearing before us we have selected the appeal of KRA Holding Trading Pvt. Ltd., Pune (ITA 500/PN/08) as a lead appeal therefore herein below discussing the facts of this case however they shall apply mutatis mutandis for the other appeal as far as applicability of the propositions and the law are concerned. 3. This appeal emanates from the order of the ld. CIT (A), order dated 1-2-2008 which was filed at the behest of this assessee and against that order now further in appeal. First issue, as per the Grounds of appeal lifted from the appeal memo, is arising from the following (1) to (3) grounds as under- "1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the view of the learned Assessing Officer that the appellant was a dealer in shares and therefore its income from this activity was assessable under the head 'profits and gains from business' and not under the head 'Capital gains' as contended by the Appellant; Without prejudice to the generality of the above ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the Principal Officer and mainly the contents were that the profits were earned by purchase and sale of Shares, number of transactions stated to be as follows:- Purchases (Rs.) Sales (Rs.) Profit (Rs.) No. of Shares Sold No. of Scrips 8,76,48,726 10,57,15,959 1,80,67,233 4,36,793 96 6. The Assessing Officer has referred section 2(13) of IT Act to define the term "business" and also cited few case laws, for the sake of brevity at present not reproduced. The appellant had contested before the Assessing Officer that the activities were carried out through Portfolio Managers and so the assessee played a passive role in those Transaction. It was explained that out of total sale consideration of Rs. 9.34 crores the amount about 56 per cent came from earlier year purchase of shares, hence the holding period of the shares was more than one year so it was incorrect to take a view that the transactions were short term in nature. It was contested that since own funds were utilized hence it was not with business motive and always classified in the account as investment. However the Assessing Officer has refuted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase price of shares thus the profit was calculated after deducting the fees as it happens in normal course of calculation of business profits. The Assessing Officer has concluded that the assessee's activity was a systematic business activity conduct with a profit motive, therefore dealing in shares could not be said to be an investment activity but a trading activity, therefore the profit of Rs. 2,06,22,917 was to be taxed as business income. Being aggrieved of the action of the Assessing Officer of taxing the impugned amount in it's hands an appeal was preferred. 9. Before the first appellate authority the emphasis was that a Portfolio Manager works in pursuant of a contract hence the management of a portfolio is an independent activity of that person not governed by his client i.e. the assessee. It was also explained that there are two types of Portfolio Managers viz. discretionary and non-discretionary Portfolio Managers, one who manages either independently or under the directions of the clients. Then the appellant has attempted to draw similarity between a Mutual Fund and the Portfolio Manager to establish that both has almost similar broad contours. Thereafter a det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in part (vi) of para 3, constitute an organic whole of carrying on dealing in shares and units in a systematic and organized manner. Therefore, the conclusion of the Assessing Officer that income from sale of shares and units requires to be taxed as 'Income under the head Business of Profession' is held to be justified on facts because it is based on proper application of law on given facts. The action of the Assessing Officer in this regard is upheld. Ground Nos. 1 2 of the appeal are held to have no merit and they fail." 10. Being aggrieved now this assessee is further in appeal. Heard both the sides at length and case records perused carefully in the light of compilation and case laws placed before us. Hereunder we shall deal with the arguments of both the parties. 11. The relevant facts in question are not in dispute and the nature of activity of the company is also not in controversy. The appellant is an investment company. It holds 18 per cent shares of Thermax Ltd. One of the important aspect is that on account of holding 43,00,000 shares of Thermax, the assessee investment company has stated to have earned dividend of Rs. 18 crores from Thermax during the period 1995 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive transactions on behalf of his client i.e., assessee. The Portfolio Manager shall also not purchase or sell the securities which are settled otherwise than by actual delivery or transfer of securities. The Portfolio Manager is forbidden to pledge or give loan on behalf of the client against the securities without obtaining a written permission. An another restriction imposed on the Portfolio Manager was that it shall transact in security within the limitation placed by the client with regard to the dealing in securities under the provisions of Reserve Bank of India Act, 1934. Though there were certain restrictions but a liberty has also been granted that the Portfolio Manager shall be at the sole discretion in respect of making of investment. In this regard the judgment and the opinion of the Portfolio Manager shall be his independent decision. The investments, therefore, are in the custody of the custodian i.e. Portfolio Manager who does follow up for bonus shares, rights issue and receipt of dividend etc. There is a long list of investment strategy to be followed by the Portfolio Manager. In this regard, our attention was subsequently drawn on one of the clauses that shares ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have to examine the facts of the present case in the light of such accepted principle as laid down by several hon'ble courts. Though we are also aware that to determine the character of a particular asset it always depends upon the facts of each case and in the past remained a subject of controversy. However, a realistic view needs to be taken on the scale of circumstances and the surrounding facts of this case. 14.2 Likewise the definition of "capital asset" is not a piece of colourable legislation but specific and without any ambiguity hence to be strictly adhered to, so as to arrive at a decision. "Capital asset" has been bifurcated into two types and that is on the basis of period of holding. Section 2(29A) defines "long term capital asset" means a capital asset which is not a short term capital asset. A "short term capital asset" is defined in section 2(42A) means capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, a proviso is attached to the said section which says that in case of a shares held in a company the provision of this clause shall have effect as if for the words of 36 months the same substit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 07 reported in 210 ITR (statute) 29 says that to arrive at a conclusion guidelines are to be drawn from the decision of the Hon'ble Supreme Court in the cases of CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586, CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 and a decision of Authority for Advance Rulings (Income-tax) in the case of Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR - New Delhi). After citing the relevant portion of the verdict it has also been acknowledged by the CBDT that it is possible for a taxpayer to have two portfolios i.e., an investment portfolio comprising of securities which are to be treated as capital asset and the other portfolio can be trading portfolio comprising of stock-in-trade to be treated as trading asset. The Board has further clarified that in case of holding these two portfolios the assessee may have an income under both the heads i.e. "capital gain" as well as "business income". In that manner, the Board has concluded that the Assessing Officers are advised to determine the character and the nature of an investment in the light of the cited decisions and advised not to resort to a single p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an enhanced price then such an activity by itself is not enough to treat as a revenue activity but it must be in conjunction with the conduct of the assessee and the other circumstances which point out that the transaction is having the character of trading. The Hon'ble Court has further made an observation that such an investment, though motivated by a possibility of enhanced value does not render the investment a transaction in the nature of trade and the test to be applied is that such shares are reflected as stock-in-trade of a business. 16. Next in the line is the decision of Hon'ble Supreme Court in the case of CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377 and the court has accepted that there is a enigma in deciding such issue of "holding of investment". The relevant portion is reproduced below: "We next come across another expression, which is far more difficult to comprehend than the one that we were considering til now. Section 23A speaks of the business of "holding of investments". Here comes the enigma. It is easier to understand when the section speaks of a company having the business of dealing in investments though to say that the company is dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Benches has also been cited in the case of Kankhal Investments Trading Co. (P.) Ltd. v. Asstt. CIT [2009] 116 ITD 492 (Mum.), an unreported decision, nevertheless the significance of this judgment is that respected Bench has deliberated upon the expression "business of holding of investment" and by referring the judgment of Hon'ble Supreme Court in the case of Bengal Assam Investors Ltd. (supra) it was commented that there is nothing like the business of "holding of investment". However, the conclusion was that where a specific head is provided in respect of a particular income then such income must be computed under that very head and in a case if investment in shares is disposed of then income therefrom has to be computed only under the specific head i.e., capital gain. 20. In the earlier stages also, this problem was posed before the Tribunal and vide judgment in the case of Reva Investment (P.) Ltd. v. ITO [1990] 35 ITD 90 (Ahd.), a reference was made of landmark judgment in the case of H. Holck Larsen (supra) and relying upon the said judgment, an observation was made that accretion to capital does not become income merely because the original capital was invested in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termed as the business activity; as defined in the statute and also deliberated upon by several Hon'ble Courts, by the investor, in this context two facts have significantly emerged one is that the entire investment was out of the past corpus earned in the form of dividend, therefore, accepted position is that the assessee was holding shares of Thermax in the past several year and therefrom earned substantial dividends which has generated the capital corpus which was invested in the capital market that too through Portfolio Manager. An another fact which has undisputedly emerged was that the investment in share was not out of borrowed funds and there was no necessity of borrow of funds for the purpose of purchase purposes as it is generally being done in the regular business activity. 24. One more aspect as emerged is that the transactions were on delivery basis and not speculative in nature i.e. without taking the delivery. In the present case, the badla transaction and the speculative transactions have been specifically forbidden as per the mutual agreement, nevertheless the significant aspect is that the decision to buy and sell was not dependant upon investor i.e. the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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