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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAJESH KUMAR
O R D E R
PER C.N. PRASAD, JM:
This appeal is filed by the Revenue against the order of the Ld. CIT(A)-30, Mumbai dated 30.12.2013 pertaining to assessment year 2010-11.
The only issue in the appeal of the Revenue is that the Ld. CIT(A) erred in holding that profit arising on sale of shares was liable to be assessed as Short Term Capital Gain and Long Term Capital Gain and not under the head business income.
At the outset, the Ld. Counsel for the assessee submits that this issue has arisen in assessee’s own case for assessment year 2008-09 wherein the Co-ordinate Bench of the Tribunal held that the transactions were resulted in capital gain, directed the Assessing Officer to accept the capital gains as returned by the assessee. The Ld. Counsel submits that the Ld. CIT(A) followed the order of the Co- ordinate Bench for assessment year 2008-09 and also various other decisions accepting that the transaction of purchase and sale of shares are held to be assessed under capital gain and not as business income.
The Ld. Departmental Representative supports the orders of the lower authorities.
On going through the order of the Co-ordinate Bench, we find that an identical issue has come up in assessee’s own case for assessment year 2008-09. The Co-ordinate Bench held that the transactions resulted in capital gains and not business income observing as under:
“We have considered the rival submissions and carefully considered the orders of the lower authorities and the paper book submitted by the assessee and the decisions relied upon by the rival parties. The assessee is a private family trust. It is not in dispute that the assessee has invested its corpus fund in purchase of shares/securities through four Portfolio Management Services namely (1) Reliance Capital Asset Management Ltd. (2) DSP Merrill Lynch Fund Managers Ltd. (3) Karma Capital Advisors Pvt. Ltd., and (4) Kotak Securities Ltd. A perusal of the contract between the assessee and the Reliance Capital Asset Management Ltd. show the intention of the assessee as provided at point No. 3 at page-1 of the agreement exhibited at page-56 of the Paper book which is as under:
The client is desirous of appointing the portfolio manager for managing the investment of its funds on a discretionary basis to avail of investment advisory and portfolio management services from the portfolio Manager, for the purpose of investment to be made in securities
At clause 11.10 of the same agreement, it is provided The Portfolio manager shall not a) Trade on margin or on a speculative basis on behalf of the client. All transaction shall be on delivery basis. b) Pledge or give loan on securities held on behalf of the client to a third person without obtaining a written permission from the client. c) The Portfolio Manager shall not deal based on price- sensitive classified information.
Similar clauses are found in the agreements with other three Portfolio managers. A perusal of these agreements clearly show that the intention of the assessee to appoint these Portfolio managers is to invest its corpus fund in shares and securities for wealth creation. It is worthwhile to note here that the submissions of the assessee have been rejected by the lower authorities only because the assessee has engaged Portfolio manager to look after its investment. Further, more thrust is given on the volume, periodicity and frequency of transaction.
The issue, whether the income from sale and purchase of shares in a particular case should be treated as capital gain or business income has been a debatable issue and there are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its own factual situation. It is possible for an investor to sell shares after holding for less than a year in order to reshuffle portfolio. In the present case, it is not in dispute that the average holding period is 178 days. The ITAT Pune Bench in the case of Apoorva Patni Vs ACIT (supra) has held that “having regard to operating maximum of a discretionary portfolio management agreement, the relationship between the PMS provider and the assessee cannot be contemplated as that of a mere agent as understood in the common parlance.” 12 In this background, the finding of the Ld. CIT(A) that the PMS are nothing but agents working for and on behalf of the assessee is not correct. All decisions regarding investments, its timings etc. are made by the PMS provider and not by the assessee per se, though the resultant gain/loss is on account of the assessee’s investment. The contention of the Revenue authorities that in respect of certain scrips, the holding period was very less cannot be held against the assessee inasmuch as it had no control on such decision making in a discretionary PMS arrangement because such decisions were taken by the PMS provider.
In so far as other objections of the revenue authorities that there was volume and frequency of transactions were large so as to constitute business activity. We find that the assessee has engaged 4 PMS provider, has transacted in 7 shares and the total number of transaction is 110. In a Stock Exchange, where more than 5000 shares are traded every day , the observations of the lower authorities do not carry much weight”.
Following the said order, we uphold the order of the Ld. CIT(A) in holding that the purchase and sale of shares by the assessee for the assessment year under consideration shall be assessable under the head capital gains and not income from business.
In the result, the appeal filed by the Revenue is dismissed.