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TMI Blog2011 (12) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;3. That ld. CIT (Appeals), New Delhi has erred in facts and law in holding the Long Term and Short Term gains/losses on sale of equity shares under Portfolio Management Scheme as business income and not under the head Capital Gains; 4. That ld. CIT (Appeals), New Delhi has erred in facts and law in holding the charging of tax on the gains/losses on sale of equity shares under Portfolio Management Scheme as business income and not under the head Capital Gains; 5. That ld. CIT (Appeals), New Delhi has erred in facts and law in holding that the exemption under section 10(38) on long term capital gains on sale of Equity shares under Portfolio Management Scheme is not allowable; 6. That ld. CIT (Appeals), New Delhi has erred in facts and law in holding that tax at concessional rate of 10 per cent under section 111-A on short term capital gain on sale of Equity shares under Portfolio Management Scheme is not applicable; 7. That ld. CIT (Appeals), New Delhi has erred in facts and law in holding the initiation of penalty under section 271(1)(c) and alleged furnishing of inaccurate particulars of income and thereby concealing income; & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of time. The assessing officer thereafter examined the nature of Portfolio Management Scheme and duties of portfolio manager. He noted that portfolio manager proceeds systematically to manage on an ongoing basis the collection of securities in his custody in tune with market variations to optimize in the return of process. He carries out regular follow-up trading operations, selling securities on hand and/or buying new items of security based on the sentiments and movement of the stock market. In fact he makes sizeable profits through these supplementary follow-up operations. He chooses to buy securities when the market is bearish and sells or off-loads those securities when market is bullish. This enables him to secure considerable trading profits which results in the value addition to his holdings. The ld. assessing officer in view of these facts came to the conclusion that the transactions were not of investment but an adventure in the nature of trade. The shares were purchased with the sole intention of selling them and not to holding them as investment. The assessing officer, therefore, treated the profits arising on purchase and sale of shares under PMS as business income. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from sale/purchase of equity shares has been disputed by the assessing officer. 6. As regards the claim of the assessee that income derived from share trading has been assessed as capital gains in the preceding year, ld CIT(A) had held that merely because the tax authorities had assessed it as capital gain in preceding year would not in any way operate as res-judicata to preclude from holding the same as business income in subsequent year. He placed reliance on the decision of Hon'ble Supreme Court in the case of New Jehangir Vakil Mills Co. Ltd. v. CIT [1963] 49 ITR 137; Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC); and Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486. He also observed that the transactions dealing in shares is a mixed question of law & facts and the legal effect of fact on which the assessee could be treated as a dealer or as investor is a question of law. He placed reliance on several decisions in support of the contention. The ld. CIT (Appeals) further observed that when what is done is not merely a realization or a change of investment, but an act done in what is truly the carrying on of a business, the amount recovered as appre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was engaged in dealing in shares. As regards the frequency of number of similar transactions, the ld. CIT (Appeals) observed that the assessee has entered into numerous and frequent transactions on regular basis to carry out his trading venture in shares. The ld. CIT (Appeals) therefore, came to the conclusion that the assessee was carrying on dealing in shares in a systematic and organized manner. Therefore, the conclusion of the assessing officer that income from sale of shares claimed as investment was to be assessed under the head 'Income from business or profession'. 8. Before us the ld. AR of the assessee submitted that the assessee is engaged in the business of providing technical, marketing and maintenance services for earth-movers and also deals in trading of tires. Substantial part of income is generated out of the above business of the assessee. The assessee had invested surplus funds in units or mutual fund and in shares through Portfolio Management Scheme [PMS]. The assessee is not dealing in shares as business income. The investments in the year under considerations were made as in the last year. The transactions of purchase and sale of equity shares under PM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing dynamics of the market. It prevents holding of dormant or stocks of depreciating value. The PMS provides the skill and expertise to steer through the complex volatile and dynamic conditions of the market. A portfolio manager proceeds systematically to manage on an on going basis the collection of securities in his custody in tune with market variations to optimize his returns in the process. He carries out regular follow-up trading operations, selling securities on hand and or buying new items of securities based on the sentiments and movement of stock market. He chooses to buy securities when market is bullish and sells those securities when it turns bullish. This enables him to secure considerable profits as a result of value addition to his holding. 10. Under PMS a person deposits the money under the contract for a period normally not less one year. After depositing the money the investment in securities is left to the choice of the portfolio manager. The assessee has no control either on selecting the securities or the period of holding. The portfolio manager normally gives the account quarterly on the basis of which the investor comes to know about the profit earned and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of investment in units of mutual fund. 12. Further, in case of an assessee, who purchases shares from the market and sells frequently after getting them routed through the DEMAT account. Such transactions will be in the nature of trading activity and the resultant profit will be assessed as business profits. Merely because the shares are credited to DEMAT account at the time of purchase and debited at the time of sale would not make the transactions in the nature of investment. What is important is the intention at the time of purchase, frequency of transactions and volume of the transactions even if he has employed his own funds. 13. The assessee had made investment under PMS. The profit has not arisen directly from the deposits made, but from the securities purchased from such deposits, which were traded by the portfolio manager on behalf of the assessee. The quantity of share traded is huge as is evident from the list appended with the assessment order. The shares have been traded frequently with a motive to maximize profit and not with a view to hold them as investment. The volume of the transaction is very high. All these facts indicate that the portfolio manager had in fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mistake committed earlier should not be perpetuated. Hon'ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 has held mistake committed earlier should be rectified. It should not be perpetuated. Hon'ble Supreme Court summarized their views at page 124 in following words:- ".....To perpetuate an error is no heroism. To rectify it is the compulsion of the judicial conscience. In this, we derive comfort and strength from the wise and inspiring words of justice Bronson in Pierce v. Delameter (A.M.Y. at page 18): " a judge ought to be wise enough to know that he is fallible and, therefore, ever ready to learn: great and honest enough to discard all mere pride of opinion and follow truth wherever it may lead : and courageous enough to acknowledge his errors " In view of decision of Hon'ble Supreme Court we dismiss the contention of the assessee that in assessment year 2005-06 the similar transactions were treated as capital gains on the ground that the view taken earlier was not in accordance with the law. Profit arising from a trading transaction cannot be treated as capital gain. Accordingly in view of the above discu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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