TMI Blog2014 (9) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ager indicate that regardless of the level of discretion handed over to the portfolio manager, there is neither any guarantee that the securities invested in will appreciate nor is the portfolio manager responsible to the client for nay loss from the deficiency of value of the securities. The PMS agreement at best, embodies the intention to appoint an agent with limited liability, who will invest on behalf of the investor and nothing more - 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 - 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 - 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case the purported findings of both the learned Commissioner of Income Tax (Appeals) and the learned Assessing 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 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 incidental 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 carried 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 ₹ 30,45,835/- AS BUSINESS INCOME. 5. It is submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 2006-07 there was a short term capital loss of ₹ 18,828/- and the 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 ₹ 6,78,172/- and investment in shares of ₹ 1,46,68,799/- and the same is accepted u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has withdrawn all the money in the PMS and invested in the bank FD. The question as to whether profit earned on sale of equity share under portfolio management scheme was assessable as capital gains, has been dealt by the Hon ble Delhi High Court in the case of Radials International (supra), wherein relevant observation of the Hon ble High Court was as under :- 8. This Court has considered the submissions of both parties. At the outset, it would 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 manager has full discretion to invest in respect of the client s 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 expenses 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, would 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 price 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 intention 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, until the securities are actually resold. Moreover, in a discretionary PMS, it b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Agencies 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. 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 Advance 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature 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 investments 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 following is the volume of transactions on the basis of holding period. 20. It is clear thus, that about 71% of the total shares have been held for a period longer than 6 months, and have resulted 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, as 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 longer than one year. This is because the number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular 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 which 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 investment 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 220 during the year under consideration, 65 transactions was for ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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