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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’: NEW DELHI
Before: SHRI CHANDRA MOHAN GARG, & SHRI L.P. SAHU,
common order for the sake of convenience and brevity.
Both the assessees have raised similar solitary ground of appeal in both the appeals. At the outset, we may mention that both the parties agreed that the facts and circumstances of both the appeals are same and similar. We first take up pertaining to Shri Kamal Shiv Kumar, the husband.
Shri Kamal Shiv Kumar [ITA No. 5362/Del/2012]
The ld. AR submitted that the CIT(A) has grossly erred in law and on facts in upholding the order of the AO who has wrongly treated the short term capital gains amounting to Rs. 26,63,803/- as business income by completely ignoring the facts and documents placed on record.
The ld. AR drew our attention towards pages 24 and 25 and submitted that the average holding period of shares for the entire portfolio is 6.86 months, i.e. 205 days and, therefore, the intention of the assessee was to make investment and to earn capital gains and there was no element of business income therefrom. The ld. AR, elaborating the facts of the case, submitted that the total numbers of held for less than three months was only 55 and the number of transactions where shares were hold for above three months were 155 days and the average holding period of long term portion was 15.81 months i.e. 474 days. Therefore, the intention of the assessee was very clear to make investments and not to do business of the shares.
The ld. AR drew our attention towards Circular No. 6/2016 dated 29th February 2016 of the Central Board of Direct Taxes and submitted that where the assessee itself, irrespective of the period of holding the listed shares and securities opts to treat them as stock in trade, the income arising from transfer from such shares/securities would be treated as its business income. The ld. AR placing reliance on the decision of the ITAT, Special Bench, Delhi in the case of Suraj Overseas (P) Ltd dated 14.10.2015 submitted that referring to the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of Radials International Vs. ACIT reported at [2014] 367 ITR 1[Delhi], the Hon'ble High Court held that business is of adventure in the nature of trade, purchase and shares with own funds and investment of shares under portfolio management agreement is not disclosing intention to make profit and if shares are held for long time, then profit from sale of shares is not assessable as business income and the same should be termed as either long term capital gain or short term authorities below may kindly be dismissed and the AO may be directed to treat the income as ‘short term capital gain’ instead of ‘business income’.
Replying to the above, the ld. DR drew our attention towards para 2.2 of the impugned order and submitted that the action of the AO was quite correct and justified in treating the income of the assessee as business income because the intention of the assessee was to earn profit from purchase and sale of shares as adventure in the nature of trade. However, the ld. DR could not controvert this situation that the Circular No. 6/2016 dated 29th February 2016 of the Central Board of Direct Taxes supports the case of the assessee.
In rejoinder to the above contention of the ld. DR, the ld. AR submitted that in para 3 of the appellate order, the CIT(A) noted that the appellant is a non-resident and has filed his return of income electronically on 31.3.2009 declaring an income of Rs. 26,63,803/- as short term capital gain from investment in shares /mutual funds. The CIT(A) further noted that the appellant is a citizen of USA and a person of Indian origin working as IT consultant in USA and for making investment in shares in India, the assessee gave power of attorney to ING Vyasa Bank to act as portfolio investment banker. The ld. AR contended that therefore, in view of the proposition laid down by the [supra], the income accrued to the assessee from these investments cannot be treated as business income and the same has to be taxed under the head long term capital gain or short term capital gain.
We have heard the rival submission and have perused the relevant material on record. On careful consideration of the above rival submissions, at the very outset, we may point out that as per the above mention circular dated 6/2016 of CBDT, the assessee has an option to opt whether the listed shares/securities are stock in trade or investments, irrespective of the period of holding of shares/securities. As per para 3 of this Circular, it is prerogative of the assessee to treat the listed shares and securities as stock in trade as investment and if the assessee is treating the same as stock in trade, then the income arising from transfer from such shares/securities has to be treated as long term or short term capital gains. In the present case, admittedly, and undisputedly, the assessee is a non-resident Indian working as I.T. consultant in USA.
The AO has not controverted this fact that the assessee used his surplus money for making investment in shares in India and power of attorney was given to ING Vysa Bank to act as portfolio investment banker of the assessee. The proposition laid down by the Hon'ble Delhi Court in the case of Radials International [supra] comes to the assessee purchases shares with its own funds and investment of shares has been made under portfolio management agreement and agreement is not disclosing intention of investor to make profit and shares have been held for long time, then profit from sale of shares is not assessable as business income. The relevant operative part of this order in paras 8 to 12 at pages 8 to 11 reads 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 appears to be a discretionary portfolio, as indicated in clause 9 (by which client "unconditionally and irrevocably" grants power of attorney to the portfolio manager to make decisions on the investments), clause 10 states that the portfolio manager provides no warranty as to the appreciation of the securities in which he applies the client's funds. Therefore, it is clear that a PMS agreement can be an instrument by complete authority and discretion over the
From the terms of the agreement it does not emerge that the intention of the investors to make profits. The terms on the other hand, 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 any loss from the deficiency of value of the securities. Thus, 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.
10. The Ld. ITAT reasons that "at the time of deposit of amount, the intention of the assessee was to maximize the profit" because first, while the assessee enters the PMS as investments in the books of account at the time of depositing the money, the assessee does not know what specific transactions will be entered into by the manager, second, that the assessee finds out the details of the transactions only after three months have expired and, only at the end of the year can the shares in the DEMAT account be entered into the books of account, third, the assessee has no control over the shares bought or sold under the PMS and thus the portfolio manager enters into transactions on behalf of his clients to maximize profits. From this, the ITAT infers that "it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment". The reasoning of the Ld. ITAT does not find favour with this Court for three reasons.
11. First, the three reasons provided by the ITAT merely convey that intention to hold shares as investment cannot be inferred from the agreement. However, the fact that no inference of an intention to 8 & 6067/Del/2012 invest can be made from the agreement does not translate to the intention to trade in shares for profit either. As was noted in Raja Bahadur Kamakhya Narain 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.
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 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.”
the AO or the ld. DR that the source of the funds of the assessee were its own surplus funds and thus we may safely presume that the assessee made investments from his own surplus funds. The AO and the ld. DR have not controverted this fact that the assessee made investments in shares/securities in ING Vyasa Bank to act as portfolio investment banker and no investment has been made directly by the assessee in the nature of business adventure in the nature of trade.
We may also point out that as per the ratio of the decision of the Hon'ble High Court of Delhi in the case of Radials International [supra] the intention of the assessee must be inferred holistically from the conduct of the assessee, circumstances of the transactions and not just from seeming motive at the time of depositing money. Their Lordships held that 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. Lastly, their Lordships held that 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 and if the transactions entered into by the assessee are through portfolio banker are not adventure in the nature of trade, then the same should be treated as investment and income accrued therefrom has to be taxed ground raised by the assessee is allowed and the AO is directed to treat the income accrued to the assessee from sale of shares through portfolio manager as income from long term /short term capital gain.
Since facts and circumstances of this assessee are identical to the facts and circumstances in the case of Shri Kamal Shiv Kumar, the husband of the assessee, on similar issue, therefore, our conclusion arrived at by us in the case of the husband Shri Kamal Shiv Kumar would apply mutatis mutandis to the case of Smt. Lea Ann Kumar. Consequently, Ground No 1 is allowed in the case of this assessee also.
In the result, both the appeals of the assessees stand allowed.
The order is pronounced in the open court on 26.08.2016.