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Order under section 254 (1) of Income Tax Act PER PAWAN SINGH JUDICIAL MEMBER; 1. This appeal filed by Revenue u/s 253 of Income Tax Act (Act) is directed against the order of ld. Commissioner of Income-tax (Appeals) - 30 Mumbai dated 29th September 2014 for Assessment Year 2006-07.
The brief facts of the case are that for the year under consideration the assessment under section 143(3) was completed on 30 December 2008 assessing the income of assessee at Rs. 4,02,91,080/-against the declared income of Rs.4,01,10,695/-. In the assessment order the AO treated the profit on the sales of shares as ‘Business Income’ in instead of ‘Short-Term Capital Gain’. On appeal before Commissioner (Appeals) the order of AO was reversed and the AO was directed to assess the sale and purchase of share held that investment under the head Short-Term Capital Gain. The revenue filed appeal before Tribunal vide appeal wherein the issue was restored to 1 Harsha L. Tahilramani
the file of AO to decide afresh vide order dated 10 August 2011. The AO and the assessment proceeding under section 143(3) r.w.s. 254 treated the entire profit from sales of share under the head ‘Profit and Gain from Business and Profession’ in its order dated 28 March 2011. On second round of appeal before Commissioner (Appeals) out of the total claim of STCG of Rs. 2,01,14,491/- the Gain pertaining to PMS activities of Rs. 1,31,52,241/- was treated as STCG and the balance amount of Rs. 69,62,250/- which was outside the purview of PMS activity and relates to the transaction of sale and purchase carried out by the assessee herself as “Business Income”. The ld Commissioner (Appeals) also issued a notice of enhancement vide notice dated 18 September 2014. After considering the contention of assessee disallowed Rs. 13 lacs which was claimed on account of consultancy fee and added to the income of assessee. Thus, being aggrieved by the order of Commissioner (Appeals) the revenue has filed present appeal before us, raising following grounds of appeal: (i) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding the gains resulting from PMS activity as STCG without appreciating the fact that the volume and frequency of trading and use of portfolio management services clearly indicate that the nature of games was business income. (ii) The appellant prays that order of ld Commissioner (Appeals) on the above ground be set aside and that of the AO be restored. (iii) The appellant claims leave to amend or alter any ground or add a new ground which may be necessary.
We have heard the ld DR for the Revenue and the ld AR for the assessee and perused the material available on record. The ld DR for the revenue argued that assessee source of income is from dealing in the Shares. The assessee involved in the sale and purchase of shares from last several years, the entire time of the assessee is devoted in the stock market operations. The assessee is engaged in regular and systematic acquisition of share to maximize the profit and utilize the borrowed capital for acquisition of shares. The assessee involved in the repeated transactions in a systematic and organized way the motive and intention of the assessee is to do a business. On the other hand the ld AR of the assessee argued Harsha L. Tahilramani that assessee is basically and predominantly in investment and the same treatment is given by the assessee in accounts by declaring the cost of share in investment in balance-sheet. The assessee is availing the services of Portfolio Managers registered with SEBI and these facts were brought on record specifically Motilal Oswal Securities Ltd with whom the assessee has an agreement for providing discretionary Portfolio Management services. The assessee has provided the copy of ledger account and the details of the payments of Management fees amounting to Rs. 7,57,210/- out of which an amount of Rs.6,96,133/- was towards un-booked profit on the purchase value of the shares/securities numbering 10 scripts having cost of Rs. 2,51,37,095/- and another Portfolio Manager Mr. Ravi Chadda of Proudgy Investment who is also registered with SEBI. Mr. Ravi Chadda also provided discretionary services and on his advice 21 script worth Rs. 2,13,56,580/- was kept in the stock without doing anything on its and un-booked profit to the extent of Rs. 60,60,328/- was subjected to professional fees amounting to Rs. 6,36,032/-. The ld AR of the assessee supported the order of Commissioner (Appeals).
We have considered the rival contention of the parties and perused the order of authorities below. The Tribunal vide order dated 10.08.2011 gave specific direction as contained in para 6.3. The AO while framing fresh assessment order instead of confining on the direction of the Tribunal examined the case as it was open to examine the whole issue. The AO observed that assessee is an individual and during the year under consideration assessee has shown income from trading of derivative segment. The assessee also shown Short-Term Capital Gain of Rs. 2,01,14,491/-on sale of shares and Long-Term Capital Gain of Rs. 1,21,81,611/- the assessee has also shown unsecured loan of Rs.2,75,60,717/- and Bank Overdraft of Rs. 17,60,610/- the assessee’s own Capital was of Rs. 81,73,712/- while investment in share was Rs. 5,07,20,923/-. Besides that assessee was having unsecured loan of Rs. 54,81,686/-. The assessee’s own Capital was of Rs. 6,92,44.842/- as on 31 March 2006 and investment in share was Rs. 9,69,55,006/-. The AO concluded that substantial borrowed fund has been used Harsha L. Tahilramani
for purchase of share and the investment is mainly from the borrowed fund. The AO further on the basis of number of transaction, frequency, period of holding, treatment and books of accounts held that the intention of the assessee with a clear motive of maximizing profits goes to show the existence of intention of trade as a business activity and concluded that that the income from sales and purchase of share was income from the head “Profit and Gains of Business and Profession” and not Capital Gains. The learned Commissioner (Appeals) after considering the contention of the assessee held as under: (5.1) I have carefully considered the submission of the appellant and find that the impugned order has been passed on the direction issued by the ITAT wide order dated 10 August 2011 in 07). The said para has already been reproduced by the AO in his order. However, for the sake of convenience and ready reference, it is re-produced hereunder: “in the given facts and circumstances, if the purchases and sale of shares are carried out under the scheme of Portfolio Management then the same cannot be treated as trading in share, however in the resent case the Portfolio Manger has also provided the credit facility to the assessee and there is nothing stipulated in the terms and conditions of the agreement about the said credit facility availed by the assessee from the Portfolio Manager. Therefore, the true nature of arrangements/transactions of credit facility between the assessee and the Portfolio Manager has to be verified and examined. It is necessary to find out as to how and terms and credit facility was provided by the Portfolio Manger and whether the repayment was made by the assessee on the basis of fixed duration or the Portfolio Manager has adjusted the sale proceeds against the credit facility provided- by it as well as the interest charged on the same at the time of liquidation/ sale of the shares/stock held in the name of the assessee. In case of Portfolio Manager is using its own funds in the name of the assessee and receiving back the money on the sale of the stock and shares and, offer adjuscting/ receiving its own money from the sale proceeds, the balance is transferred to the account of the assessee; then, the said arrangement cannot be termed as investment through Portfolio Management Scheme. Rather, there is no fund of the assessee to be managed by PMS. Accordingly, the matter is required a proper verification and examination to ascertain the true nature of the arrangement between the assessee and the Portfolio Manager about the credit facility of the level of the AO. Hence, the matter is set aside to the record of the Assessing Officer to decide the issue afresh as per law and in the light of our above observation one other considering the contention of the assessee."
5.2 The ITAT, therefore, desired that the nature of the arrangement/transaction of credit facility between the appellant and the Portfolio Manager, has to be verified and examined, and, in the said regard, the above transaction has to be classified, as under.- Harsha L. Tahilramani i. How and on what terms the credit facility was provided by the Portfolio Manager? ii. Whether the repayment was made by the appellant on the basis of fixed duration, or iii. The Portfolio Manager has adjusted the sale proceeds against the credit facility provided by it as well as the interest charged on the same at the time of liquidation/ sale of the shares/ stock held in the name of the appellant.
5.3 The tribunal, has therefore directed that if the Portfolio Manager is using its own funds in the name of the appellant and receiving back the money on the sale of the stock and shares and, after adjusting/receiving its own money from the sale proceeds, the balance is transferred to the account of the appellant; then, the said arrangement cannot be termed as investment through Portfolio Management Scheme. Rather, there is no fund of the appellant to be managed by PMS. The AO was, thus, required to examine the above three things, i.e. terms of the credit facility provided by the Portfolio Manager; whether the repayment was made by the appellant on the basis of fixed duration; or the Portfolio Manager has adjusted sale proceeds against credit facility. However, the AO has not given any clear finding on the above three directions of the ITAT. He has simply dismissed the claim of the appellant on the ground that liabilities of Rs. 3,26,59,959/- outstanding in the books of the appellant, are on account of unpaid bills and loan amount to M/s Motialal Oswal Securities Ltd. and M/s Motilal Oswal Investment Pvt. Ltd., respectively; PAN No. of Motilal Oswal Investment Pvt. Ltd. Investment Pvt. Ltd. furnished by the appellant is pertaining to M/s Motilal Oswal Financial Service Ltd; M/ s Motilal Oswal Securities Ltd has been reported on 18.12.2008, therefore, the transaction could not have been made in A.Y. 2006-07; under PMS trading of shares has been carried not only from the opening balance of shares transferred to the PMS but trading in shares and securities other than that has also been carried out; the appellant has claimed consulting fees of Rs. 15,28,338/-; the appellant's capital was of Rs. 81,73,712/- while investment in shares was Rs. 5.07 crore, as on 31.03.2005; as on 31.03.2006, the appellant's own capital was of Rs. 6.92 crore, while investment in shares was Rs. 9.69 crore, which shows that substantial borrowed fund has been used for purchase of shares since investments are mainly from borrowed funds. The AO has also recorded that 60% of the shares have been sold within three months of the purchase, which included 25% of the shares sold within one month and 10% within one week. He has, therefore, concluded that the sale and purchase of the shares was business activity of the appellant and income arising therefrom is to be assessed under business head.
5.4 From the above details discussed by the AO, which are on record, I find that the AO has misread and misinterpreted the details furnished before him. The same being, as follows: i. The appellant has income from various sources. The main income being trading in derivatives of shares, and profit generated from the said 5 Harsha L. Tahilramani activity is Rs. 2,09,01,283/-. Thus, out of income of Rs. 4,01,10,695/- declared by the appellant, almost 50% income is from above profit under the head of business income, where under she has declared business income of Rs. 1,91,14,569/-,i.e. after claiming business and expense. The above sources of income are long term capital gain and the income. The AO treated the income of Rs. 2,01,14,491/- declared by the appellant under the head short term capital gain, as business income. The appellant has also declared income from house property of Rs. 8,80,794/-. Besides, the said income the appellant also declared income of Rs. 941/- under the head other sources. It is, therefore, no denying the fact that the appellant's main activity is business in trading of shares, including derivatives of the shares. The issue before us is regarding the amount of Rs. 2,01,14,491/-, which the AO has treated as business income, as against short term capital gain declared by the appellant. ii. The appellant has engaged two PMS service providers namely, M/ s Motilal Oswal Asset Management Company Ltd and Shri Ravi Chadda, Proprietor of M/ s Prodigy Investment. The appellant has transferred the shares held by her to these PMS Service Providers and in lieu of Service provided by them paid consultancy fee. M/ s Motilal Oswal Asset Management Company Ltd, the PMS Service Provider has not purchased or sold any shares during the year. Moreover, there is no profit booked by the said PMS Service Provider during the year in the account of the appellant. The other PMS Service Provider, Shri Ravi Chadda, Proprietor of M/ s Prodigy Investment has carried out share transactions on behalf of appellant in the PMS account of the appellant with him. Shri Ravi Chadda has also not given any loan to an nor, has he given any credit facility to the appellant. The total amount of profit booked by him for the appellant is Rs. 1,31,52,241/- which is from the sale of shares transferred to the PMS account and purchase and sales of further shares from the said amount. Therefore, the PMS activity carried out by Shri Ravi Chadda is from the amount of shares transferred in the PMS account only.
5.5 Thus, out of the short term capital gain of Rs. 2,01,14,491/-, the amount of short term capital gain pertaining to PMS activity is Rs. 1,31,52,241/- only. The remaining amount of Rs. 69,62,250/- is arising out of shares transactions which the appellant has herself carried out and declared it under short term capital gain.
5.6 The unpaid bills of Rs. 1,56,99,178.18/- of M/ s Motilal Oswal Securities Ltd comprise of two amounts, viz. Rs. 69,22,630.68/ - on account of unpaid settled bills and Rs. 87,76,547.50/ - relate to March transaction to be settled in April month of the next financial year. Both amounts are not concerned with the PMS activity since the transaction carried out through Motilal Oswal Securities Ltd are relating t£ derivatives, which the appellant has already declared, as her business income or, the shares transactions carried out by her, as short term capital gain to the extent of Rs. 69,62,250/-.
5.7 The appellant has also taken loan amount of Rs. 1,69,60,780.82/- from M/s Motilal Oswal Investments Pvt. Ltd, which subsequently changed its name to M/ s Motilal Oswal Financial Service Ltd, hence same PAN of M s Motilal Oswal Investments Pvt. Ltd. continues with M/s Motilal Oswal 6 Harsha L. Tahilramani
Financial Services Ltd. The appellant has utilized this loan amount for purchase of immovable property, as well used for business activity in the trading of derivatives and other shares. 5.8 M/s Motilal Oswal Securities Ltd has been existing much earlier to the date 18.12.2008 mentioned by the AO. In any case, this is not relevant to the issue in which direction has been issued by the ITAT since PMS activity has been carried out through M/ s Motilal Oswal Asset Management Company Ltd. 5.9 The consultancy fees of Rs. 15,28,338/- has been paid to the PMS Service Provider, Shri Ravi Chadda, Proprietor of M/ s Prodigy Investment. 5.10 In view of the above discussion, I hold that the short term capital gain amount of Rs. 1,31,52,241/- which has resulted out of PMS activity is to be assessed under the head short term capital gain, as held by the High Court of Delhi in the judgment dated 25.04.2011 in in the case of Radials International. The ground of appeal as to the assessment of the capital gain declared by the appellant is, thus, allowed and the above treatment given by the AO is cancelled. The balance amount of Rs. 69,62,250/- is outside the purview of PMS activity and relate to the transaction of purchase and sale of the shares carried out by the appellant herself. The same is, therefore, not part of transactions on which directions the ITAT, which are relating to income from PMS activity declared by the appellant as short term capital gain has to be assessed as business income. Accordingly, the balance amount of Rs. 69,62,250/- declared by the appellant as short term capital gain has to be assessed as business income: as in the original assessment order, as well as in the impugned assessment order and, accordingly, confirmed”.
We have seen that the ld Commissioner (Appeals) concluded that out of the total income of Rs. 4,01,10,695/- declared by assessee, almost 50% of income is trading in derivative of share and profit generated from the said activity. The assessee has already returned the above profit under the head of ‘Business Income’ and has declared the business income of Rs. 1,91,14,569/-and claim business expenses. The learned Commissioner (Appeals) correctly appreciated that the only issue for consideration before the AO was regarding the income of Rs. 2,01,14,491/- which was treated as business income against the short-term capital gains. Out of STCG of Rs. 2,01,14,491/-the amount of short-term capital gain pertaining to PMS activity is Rs. 1,31,52,241/-only the remaining amount of Rs. 69,62,250/- is arising out of share transaction with the assessee has herself carried out and declared it under short-term capital gains. The learned 7 Harsha L. Tahilramani
Commissioner (Appeals) also considered the aspect of borrowed capital and the consultancy fees paid to PMS services provider. And while relying upon the decision of Delhi High Court in Radial International in of 2012 dated 25th April 2011 and granted partial relief to the assessee. With the above observation, we do not find any infirmity or illegality in the order passed by ld. Commissioner (Appeals). Hence, the appeal of the revenue has no merit and the same is dismissed. Order pronounced in the open court on this 06th day of December 2016. Sd/- Sd/-