ACIT 16(1), MUMBAI vs. PHEROZ R. MODY, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य राजे�� राजे�� केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 28/04/2014 of the CIT (A)-27, Mumbai, the Assessing Officer (AO) has filed the present appeal.Assessee -an individual, derives income from salary,capital gains and other sources. He filed his return of income on 30/ 07/2007,declaring total income of Rs.11.54 Crores.Scrutiny assessment u/s.143 (3) of the Act was completed on 24/12/2009,determining his income of the assessee at Rs.11.82 Crores.Later on, a notice u/s.148 of the Act was issued to the assessee. The AO finalised the assessment u/s.143 (3) r.w.s.147 of the Act on 28/03/2013 determining the income of the assessee at Rs. 11.55 Crores. 2.Effective ground of appeal is about treating the income from sale of shares is income from Short-Term Capital Gains (STCG) of Rs. 2.99 Crores and Long-Term Capital Gains (LTCG) of Rs. 87,471/- as against the business income assessed by the AO. On verification of the records, after the completion of scrutiny assessment, he found that the assessee had indulged in large- scale transaction in shares. He held that the intention of the assessee was to make profit and the income tax under the head capital gains should be taxed as business income. He found that the number of shares sold involving LTCG was only 98,200, that the total transactions in shares were 15,68,871 during the year under appeal. He held that the assessee was a trader of shares and securities as well as in future markets, that to save taxes he had conveniently divided his share

4572-ModyPR transaction into business and/or speculation where delivery was not taken or in cases of derivatives and were delivery was taken and future sales were made within 365 days as STCG/loss and wherever the shares had been held for more than 365 days the same was shown as LTCG. Accordingly,the AO treated the profits from all the share transactions as business income.

3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, the assessee challenged the validity of reassessment proceedings. It was argued that the opening was result of change of opinion,that reopening was bad in law and illegal, that the AO had not observed the procedure laid down by the apex court in the case of GKN Driveshafts (India) Ltd.(259 ITR 19),that the AO had furnished the regions recorded for the reopening only after a period of seven months from the date of assessee asking him to supply the reasons, that the AO had not disposed the objections filed by the assessee by way of a speaking order, that the AO had not recorded the reasons in time, that the permission from the superior authority was not taken as per the requirement of section 151 (1) of the Act.However, the FAA referring to various case laws held that the AO had duly recorded the reasons which had a live link with the facts of the case,that at the stage of initiation of reassessment proceedings it was not oblige -tory for him to conclude with evidence as to how much of income had escaped assessment,that it was not a case of change of opinion.Finally upheld the reopening.

4.Before the FAA,the assessee further argued that income from investment held under Portfolio Management Scheme (PMS) was liable to be taxed as income from capital gains, that the assessee had invested under the PMS for the purpose of maximisation of wealth,that the transactions entered into were delivery-based transactions,that he had no control over investment given under PMS, that the portfolio manager was not an as an and was acting on his own discretion. The assessee relied upon the cases of Salil Shah Family (P.) Trust (144 ITD 390), Anusuya Suren Mirchandani (ITA/3159/M/2012) and Radha Birju Patel (46 SOT 23).

After considering the submissions of the assessee and the assessment order,the FAA held that the issue of availing the services of portfolio manager and treatment to be given to the share transaction was no more res-integra.He referred to the cases of Radha Birju Patel (supra) and Anusuya Suren Mirchandani (supra). He held that the issue had to be decided in view of the investment objective mandated by the assessee while engaging the PMS provider which was in 2

4572-ModyPR the nature of discretionary PMS, that the PMS service provider had absolute discretion in taking day-to-day decision in so far as shares were concerned, that she would make the investment as per his own judgment and on the basis of own personal expertise without any recourse to the opinion of its client, that such decisions taken by the PMS provider are taken for a whole range of clients in its portfolio, that all the decisions regarding investments its timing are made by the PMS provider and not by the investor per se, that the dominant intention of the assessee at the time of making investment with PMS provider could only be said to be with a view of growth prospects and not with intention of making profits. Relying upon above-mentioned two orders of the tribunal,the FAA held that the AO was not justified and taxing the gains arising out of sale of shares under the head business income.

5.During the course of hearing before us,the Departmental Representative (DR) supported the order of the AO and stated that assessee had entered into large number of share transactions,that his intention was to earn maximum profit, that the AO had rightly treated him a Trader who had invested money to carry out a systematic business activity.As stated earlier,none appeared on behalf of the assessee.

6.We have values the material available on record. We find the AO had reopened the scrutiny assessment and had held that the income of the assessee arising out of sale of shares had to be taxed under the head business income and not under the heads STCG or LTCG, that the FAA reversed the decision of the AO considering the fact that the assessee had availed the services of a PMS provider.In our opinion,once an assessee approaches a PMS provider,he loses control over the decision-making process for making investment in the shares. It is the PMS provider who decides as to how much money is to be invested and in which scripts- all the decisions related with sale and purchase of shares are taken by the PMS provider.We find that the case of Radha Birju Patel(supra)the Tribunal has decided the issue as under: 5. We have heard the rival contentions and perused the record of the case. We have noted that so far as the present transactions are concerned, these transactions are undisputedly carried out by the assessee's Portfolio Manager and, therefore, these items are clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investments made by the assessee are protected and enhanced and in such a circumstance, it cannot be said that Portfolio Management is scheme of trading in shares and stock. Whether, the assessee is 4572-ModyPR engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. In our consideration view, in circumstance, in which the assessee is engaged in a systematic activities of holding portfolio through a PMS Manager, it cannot, by any stretch of imagination, be said that the main object of holding the portfolio is to make profit by sale of shares during the course of maintaining the portfolio investment over the period. As regards the high number of transactions, which have been referred to by the Assessing Officer, we have noted, on a perusal of statement filed before us, that the number of transaction reflected in the statement do not constitute independent transaction inasmuch as when, in a computer based trading system, let us say the assessee buy 1000 shares and this purchase is split over 10 transactions from different persons, while over all transactions is of only one purchase 100 shares, the statement reflect of the individual component of the transaction and will thus show a misleading high figure. Keeping it in mind all these factors as also the entirety of the case, we are in considered agreement with the conclusions arrived by the CIT(A) which needs no interference. Grievances raised by the Assessing Officer are thus rejected. Considering the facts and circumstances of the case under consideration and respectfully following the above referred order of the Tribunal,we decide the effective ground of appeal against the AO.