Capital gains treatment for discretionary portfolio management upheld where investments were made from corpus funds, not borrowed money.

Receipts from sale of shares and securities through discretionary portfolio management were assessable as capital gains, because the investments were made from corpus funds for investment purposes and not for speculative trading. The portfolio managers acted on a discretionary basis, the trust had no direct role in the timing or manner of trades, no borrowed funds were used, and the holdings were reflected at cost in the balance sheet. The volume and frequency of transactions, by themselves, were insufficient to convert the activity into business. The nature of the mandate and surrounding facts supported investment treatment rather than trading income.

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Issues: Whether the gains arising from sale and purchase of shares and securities through portfolio management services were to be assessed as capital gains or as business income.

Analysis: The assessee was a private family trust which had placed corpus funds with portfolio managers for investment in shares and securities. The agreements showed that the managers were appointed for managing investments on a discretionary basis for the purpose of investment, and that they were not to trade on a speculative basis. The transactions were executed by the portfolio managers, the assessee had no direct role in timing or manner of trades, the investments were made out of corpus funds, no borrowed funds were used, and the holdings were reflected at cost in the balance sheet. The volume and frequency of transactions, by themselves, were held insufficient to treat the activity as trading, particularly in the context of discretionary portfolio management.

Conclusion: The receipts from sale of shares and securities through portfolio management services were assessable as capital gains and not as business income.

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