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TMI Blog2012 (9) TMI 828X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) in holding that the activity of transacting in shares/mutual funds by engaging a Portfolio Management Services (in short "the PMS") was an investment activity so as to assess the resultant gains under the head 'capital gains' and not as 'business income', as contended by the Assessing Officer. 4. Briefly the facts giving rise to the aforesaid dispute as also the reasoning advanced by the Assessing Officer can be summarized as follows. The assessee an individual filed her return of income for the assessment year 2006-07 declaring a total income of Rs. 13,95,40,653/- under various heads of income, viz. income from house property, business income, capital gains and income from other sources. The income declared under the head capital gains included short term as well as long term capital gain on investments made through the PMS providers. Besides, the assessee has also declared capital gains, both long term and short term, from direct dealing in mutual funds, investments also. Apart from the aforesaid dealings in shares and securities, the assessee also had a portfolio wherein income from share and securities transactions was declared as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t value of holding in the account of the client which shows that the arrangement is with an intention to carry out business; that PMS provider carries out an organized and systematic activity of transacting in shares on behalf of the assessee which is akin to a business activity. That the PMS provider does not guarantee any return which shows that the risks associated with the trading are to be borne by the assessee which is akin to a business or trading activity. In the instant case, the Assessing Officer pointed out that the total number of scrips transacted by PMS provider was 62 which shows a high volume of transactions. As per the Assessing Officer, having regard to the facts and circumstances of the present case, the assessee could be said to have been engaged in the purchase and sale of shares in an organized and systematic manner and such activity constituted business and therefore, according to him, the instant gain earned on investments made through the PMS provider was assessable as business income. 6. In appeal before the Commissioner of Income-tax (Appeals), the assessee assailed the order of the Assessing Officer in law and on facts. As per the assessee, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings. Firstly, on the basis of the general principles for deciding whether the transactions are in the nature of investments or trading investments, he has concluded that in the instant case, the transactions bear the nature of investments and the gain thereof is liable to be assessed as capital gains. Secondly, as per the Commissioner of Income-tax (Appeals), the investment activities through PMS provider are on account of a Discretionary Portfolio Management Service agreement. Considering this aspect also, he has concluded that such transactions in shares through the PMS provider was to be viewed as an investment activity resulting in assessability of gain under the head 'capital gains' and not as 'business income'. In coming to the latter conclusion, the Commissioner of Income-tax (Appeals) has referred to and relied upon the decision of the Pune Bench of the Tribunal in the case of ARA Trading and Investment P. Ltd. and KRA Holding and Trading P. Ltd. in ITA No. 499 & 500/PN/08. Accordingly, the action of the Assessing Officer was not upheld by the Commissioner of Income-tax (Appeals) and instead, the gain on investments made through the PMS provider has been directed to be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long term growth and capital appreciation and that since the assessee opted for Discretionary Portfolio Management services from the PMS provider, the actual decision to invest in particular shares, their frequency etc., were all matters of discretion of the PMS provider and the assessee had no role to play in such decision making, except giving a broad investment objective. Secondly even with regard to the level of frequency and the volumes, the learned Counsel pointed out to pages 75 to 79 of the Paper Book wherein is placed the details of the number of scrips dealt with in the investment activity and the trading activity respectively. According to the learned Counsel, the aforesaid comparison shows that the level of activity, frequency and volumes was much higher n the case of trading activity which has been declared as business income and the same could not be said about the activity of investment carried out through the PMS provider. Further-more, it is also pointed out that the assessee has reflected the aforesaid activity as an investment activity and all such investments have been valued at cost, which shows that the same has not been treated as a stock-in-trade of the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht out the features of the Discretionary Portfolio Management services agreement wherein the PMS provider has got absolute independence in taking day-to-day decisions so far as investments in shares etc. are concerned. The PMS provider receives a lumpsum amount from the client and in a Discretionary Portfolio Management service arrangement, and the PMS provider makes the investments as per his own judgment reached on the basis of his own professional expertise and accordingly undertakes day-to-day decisions for purchase and sale of a particular scrip without recourse to the client. It is also evident that such decisions taken by the PMS provider are not client-specific, but is taken for a whole range of clients in his portfolio. No doubt, the PMS provider undertakes these transactions in the name 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 carried 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment P. Ltd. and KRA Holding and Trading P. Ltd (supra) and in holding that the assessee was indeed engaged in an investment activity while appointing the PMS provider with regard 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 factual 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 investments made through PMS during the year was 19.06 crores involving 62 scrips, whereas, in the share trading business se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer has also pointed out that earning of dividends was not at all the motive of such transactions, because the shares have been sold just before the same became ex-dividend on the stock exchanges. In this regard, we find that the Commissioner of Income-tax (Appeals) has factually found the same to be contrary to material on record as per the discussion 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 appellant has sold some shares just before the dates of the shares becoming ex-dividend or the stock exchanges. However, 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 case of scrip of Amtek Auto, the sale was made on 19.9.2005 whereas the ex-dividend date was 22.12.2005; i.e. the sale was made more than 3 months before the shares became ex-dividend. It does not necessarily follow that the dividend was already declared in this case and still the appellant sold the same before the shares becoming ex-dividend. Similarly, in the case of ACC, two particular sale dates m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 Officer was to the effect that by its very nature, sales and purchases carried out by the PMS provider was of short-term nature and, therefore, it was to be regarded as a business activity. Factually speaking, 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 when 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 reasons for churning of the investments by the Portfolio Manager 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, by the PMS, and substantial amount of long term capital gain 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner of Income-tax (Appeals). In this regard, the facts are that with respect to a property at 1, Amrutnagar, New Delhi, the assessee had declared its annual value at NIL by applying provisions of section 23(1)(c) of the Act on the ground that such property remained vacant during the year under consideration while it was let out in the earlier years till May, 2002 and again in the subsequent period from May 2007 it was let out. The Assessing Officer disagreed with the assessee on application of section 23(1)(c) of the Act on the ground that there was no material to show that any effort was made by the assessee to let out the property during the financial year 2005-05 relevant to the assessment year under consideration. Accordingly, the annual value of the property was adopted on the basis of fair rent of Rs. 20,000/- per month and after allowing statutory deduction of 30% under section 24 of the Act, income chargeable under the head house property was computed at Rs. 1,68,000/-. The Commissioner of Income-tax (Appeals) has since upheld the invoking of section 23(1)(c) of the Act by the assessee, following the decisions of the Mumbai Bench of the Tribunal in the case of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id decisions, it was held that the expression "property is let" in section 23(1)(c) does not mean that the property should have been actually let for any time in the relevant previous year, but it would be sufficient that the property was "intended to be let out" and that it was not meant for self-occupation and under these circumstances, invoking of section 23(1)(c) of the Act shall be justified. On the aforesaid proposition laid down by our co-ordinate Bench, there is no quarrel. So, however, in the present case before allowing the benefit of section 23(1)(c) to the assessee, it is for the assessee to establish that the property was intended to be let and it remained vacant in the absence of it being occupied by a tenant. In fact, the Assessing Officer has made a finding to the effect that no effort has been made by the assessee to let out the property during the year under consideration and there is no controversion to the aforesaid finding of the Assessing Officer. Therefore, factually in the present case it cannot be made out that the property was "intended to be let out" as observed by the Tribunal in the aforesaid precedents and, therefore, in our view, the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from both portfolios, i.e. share trading business portfolio as also on investments made through PMS provider, which was declared as capital gain in the return. The Assessing Officer attributed Rs. 3,85,666/- as expenditure in relation to the dividend earned on account of share trading business and Rs. 5,45,824/- was stated to be expenditure attributable to dividend income on shares dealt with as PMS activity. The Commissioner of Income-tax (Appeals) has deleted the addition of Rs. 5,45,824/- and has retained the balance of Rs. 3,85,666/- under section 14A of the Act against which the assessee is in appeal before us. 27. Before us, the learned Counsel for the assessee submitted that the impugned disallowance was in relation to a dividend income earned in the course of business activity and, therefore, the provisions of section 14A of the Act are not applicable and in support thereof, has relied upon the judgment o the Hon'ble Karnataka High Court in the case of M/s CCI Ltd v. Jt. CIT in ITA No 359 of 2011 dated 28.02.2012. 28. On the other hand, the learned Departmental Representative has relied on the orders of the lower authorities in support of the case of the Revenue. 29. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders are not sustainable and require to be set aside. Accordingly, we pass the following: ORDER i) Appeal is allowed. ii) Impugned orders are hereby set aside. iii) The substantial question of law is answered in favour of the assessee and against the revenue." In view of the aforesaid judgment, it is clear that where no expenditure is canvassed to have been incurred by the assessee in earning dividend income, no notional expenditure can be deducted by invoking section 14A of the Act. Further as per the Hon'ble High Court, in a case when assessee has not retained shares with the intention of earning dividend income and dividend income is incidental to the business of sale of shares, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income so as to be disallowed. Following the aforesaid judgment, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow appropriate relief to the assessee on this count. Thus, on this Ground the assessee succeeds. 30. The last Ground in this appeal is with regard to the closure of share trading business. The assessee claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those dealt by us in the case of Shri Apporva A Patni. In relation to Ground No.(1) involving disallowance under section 14A, we have held above that no disallowance under section 14A is called for and in that view of the matter, the said Ground has been decided in favour of the assessee. On the parity of reasoning, we hold so and thus the assessee succeeds on Ground No. 1. 34. Similarly in respect of Ground No. (2) relating to closure of share trading business of the assessee, we have affirmed the finding of the Commissioner of Income-tax (Appeals) that since the observation of the Assessing Officer had no implication in respect of the current year's assessment of income, no adjudication was called for on the said issue. On the parity of reasoning, we hold that the Commissioner of Income-tax (Appeals) made no error in refraining to adjudicate on this controversy. Accordingly, the assessee fails on this Ground. 35. In the result, the appeal of the assessee is partly allowed. 36. Now coming to ITA No 193/PN/11 filed in the case of Shri Arihant Patni, both the Grounds No. (1) & (2) raised are similar to those dealt by us in the case of Shri Apporva A Patni. In relation to Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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