AJAY PREM RANEY,MUMBAI vs. ACIT 12(2), MUMBAI

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-23, Mumbai, (in Short CIT(A)) in Appeal No. CIT(A)-23/ACIT-12(2)/IT- 339/2010-11 dated 02.03.2012. The Assessment was framed by Assistant Commissioner of Income Tax Circle-12(2), Mumbai (in short ACIT or AO )for the A.Y. 2008-09 vide his order dated 27.12.2010 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).

The only issue in this appeal of assessee is against the order of CIT(A) treating the sale consideration arising out of shares/securities through Portfolio Management Services (A.Y. 2008-09) Ajay Prem Raney vs. Asst. CIT (PMS) as business income instead of treated by assessee as short term capital gain (STCG).

Briefly stated facts are that the assessee is working partner in firm Raney & Co. which is engaged in the business of exports of handlooms, furnishing, etc. The assessee has shown STCG from various stocks held with brokers, PMS and mutual funds. The assessee claimed that it has made investment in immovable property, mutual funds, RBI Bonds, shares, etc. The assessee claimed that he has invested his own funds in mutual funds, RBI bonds and shares, except interest free loans from family members. According to the A.O., the assessee entered into substantial number of transaction in shares and these shares were purchased and sold frequently. The A.O. looking at the magnitude and frequency of shares of transaction noted that the assessee has engaged services of PMS of MF Global Nd HSBC AM and Kotak PMS and Franklin India Blue Chip Fund – Growth. The assessee furnished statements of these PMS and in view of this the A.O. was of the view that the assessee is dealt in number of shares and period of holding varies from one day to three years, which clearly shows the intention of the assessee, which is trading in shares. Accordingly, after discussing the entire theoretical aspects, he treated the STCG declared by the assessee as ‘business income’ and added to the returned income of the assessee. Aggrieved, the assessee preferred appeal before the ld. CIT(A).

The ld. CIT(A) after going through the decision of the ITAT Delhi Bench in the case of Radials International vs. ACIT (in (Del) of 2010, A.Y. 2006-07 vide order dated 16.12.2011), confirmed the action of the A.O. by observing as under: “ Apart from the transaction through PMS managers the appellant has also entered into transactions through broker MF Global, and MF Redemption. The magnitude and frequency coupled with the magnitude and frequency by the PMS agents point to the fact that the activity is of business activity and not investment. Further, details show that after sale of some shares, e.g., Gujarat Alkalies & Chemicals, Indus Development Reliance Petroleum Ltd., the appellant has re-entered the market to fresh purchases, which clearly point to the intention to make profits.

We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee is working partner in a firm which is exclusively engaged in exports of handloom furnished for fabrics. The assessee has disclosed short term capital gain from various sources i.e. Brokers, PMS and Mutual Fund redemptions. The assessee as his own investment in movable properties, Mutual Funds, RBI Bonds, share etc. the assessee has made his own investment out of own funds and there is no borrowings except interest free loan from family members. The assessee before us stated that findings recorded by AO and that by CIT(A) that shares were purchased and sold very frequently and assessee entered into substantial number of transactions in shares, is without any basis and from the statement of computation of short term profit and through brokers i.e. MF Global, it can be seen that there are hardly 34 transactions. Further, the assessee has invested through portfolio management scheme No.1 HSBC, No.2 Kotak and No. 3 ICICI Prudential Asset management totaling to Rs. 2,73,95,430/-. We find that the assessee has shown following short term capital gain from various parties as under: - “(1) From broker MF Global: 6,99,262 (A.Y. 2008-09) Ajay Prem Raney vs. Asst. CIT (2) From PMS: (i) HSBC 8,53,594 (ii) Kotak (337) (3) MF redemptuion:Franklin Blue Chip 9,655 . 15,62,174 Total short term Gain Less: (1) Custodian Charges 18,801 (2) Placement fees 10,000 (3) Management fees 2,51,603 (4) Shares expenses 53,518 3,33,922 Net short term capital gain 12,28,282

We also find that Hon’ble Delhi High Court in the case of Radials International Vs. ACIT in order dated 25-04-2014 has reversed the Tribunal decision in the case of Radials International (Supra) and for this Hon’ble High Court has considered the issue as under: - “17. This Court thus concludes that: 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 circumstances 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 into account to evaluate whether the transactions are adventure in the nature of trade (A.Y. 2008-09) Ajay Prem Raney vs. Asst. CIT

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.

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. 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 18.23% 10.06% 21.24% 50,47% total quantity Gain or loss 236,121.87 803,149.68 2,446,125.84 2,217,955.77 5,723,353.16 Percentage of 4.12% 14.03% 43.09% 38.75% CG/L to total CG/loss

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 transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions. Moreover, (A.Y. 2008-09) Ajay Prem Raney vs. Asst. CIT 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. This Court is thus of the opinion that the Ld. ITAT erred in holding the transactions to be income from business and profession. The order of the ITAT is consequently set aside and the appeal is answered in favour of the assessee.” 7. Since, both the authorities below i.e. AO and CIT(A), both have considered the short term capital gain as business income only for the reason that assessee has executed share transaction through PMS and Hon’ble Delhi High court has considered the same as capital gains be it short term capital gain or long term capital gain as the case may be. In the present case before us, the learned Counsel for the assessee drew our attention to the balance sheet and stated that entire shares are held as investment and not as stock in trade. Once intention of the assessee is to treat the purchase and sale of shares as investment, the consequence will be that whatever profit arises out of the transactions, the same will be assessed as capital gain be it is long term or short term. In this case before us, the assessee has declared short term capital gain, respectfully following Hon’ble Delhi High court in the case of Radials International (Supra), we allow the appeal of the assessee. In the result, the assessee’s appeal is allowed. पररणामतः धििााररती की अपील स्वीकृत की जाती है । Order pronounced in the open court on October 11th , 2017 Sd/- Sd/- (N. K. Pradhan) (Mahavir Singh) लेखा सदस्य / Accountant Member न्याधयक सदस्य / Judicial Member म ुंबई Mumbai; ददिाुंक Dated : .10.2017 व.धि.स./Roshani, Sr. PS