TaxTMI 
TaxTMI 
2009 (8) TMI 815
X X X X Extracts X X X X
X X X X Extracts X X X X
....appeal memo, is arising from the following (1) to (3) grounds as under- "1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the view of the learned Assessing Officer that the appellant was a dealer in shares and therefore its income from this activity was assessable under the head 'profits and gains from business' and not under the head 'Capital gains' as contended by the Appellant; Without prejudice to the generality of the above ground the learned CIT(A) erred in holding as aforesaid, in view of the alleged 'high volume, frequency, continuity and regularity of the transactions which are being done with a profit motive', a conclusion that is factually and legally incorrect; 2. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the view of the learned Assessing Officer as aforesaid based on irrelevant and extraneous facts not germane to the issue; 3. The learned Assessing Officer be directed to accept the computation of the resultant gains under the head Capital gains as claimed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ideration of Rs. 9.34 crores the amount about 56 per cent came from earlier year purchase of shares, hence the holding period of the shares was more than one year so it was incorrect to take a view that the transactions were short term in nature. It was contested that since own funds were utilized hence it was not with business motive and always classified in the account as investment. However the Assessing Officer has refuted those contentions by recording few facts that the quantity of shares sold during the year was much more; than the opening stock as brought-down from the accounting period ended on 31-3-2003 so the sales (or the year under consideration was much more, both in terms of quantity and the amount from the preceding year. It was also commented that more than 80 per cent of the transaction as done by Enam AMC Ltd. was short term transaction, rather sales and purchases were made on day to day basis. It was an organized manner transaction undertaken by the assessee by undertaking the services of one Portfolio Manager and four Brokers. According to Assessing Officer out of the 96 scrips, the Portfolio Manager dealt in 34 scrips and rest were by the said four brokers. It....
X X X X Extracts X X X X
X X X X Extracts X X X X
....folio is an independent activity of that person not governed by his client i.e. the assessee. It was also explained that there are two types of Portfolio Managers viz. discretionary and non-discretionary Portfolio Managers, one who manages either independently or under the directions of the clients. Then the appellant has attempted to draw similarity between a Mutual Fund and the Portfolio Manager to establish that both has almost similar broad contours. Thereafter a detailed discussion of other features of Portfolio Manager Scheme were made. The Ld. CIT(A) has drawn the conclusion in favour of the Revenue by reproducing a chart of total No. of transaction carried out by the assessee as follows :- Opening Investment Purchases Sales Closing Investment Profit Amount 4,10,99,374 10,22,41,151 10,53,29,322 6,66,81,582 1,80,67,234 No. of scrips 36 84 87 50 ... Total No. of shares 1,89,413 5,17,078 4,38,793 2,66,591 ... No. of transactions 35 252 187 114 ... 9.1 Ld. CIT(A) has drawn a conclusion that the appellant had purchased shares of 84 companies in 252 transactions and sold the shares ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ispute and the nature of activity of the company is also not in controversy. The appellant is an investment company. It holds 18 per cent shares of Thermax Ltd. One of the important aspect is that on account of holding 43,00,000 shares of Thermax, the assessee investment company has stated to have earned dividend of Rs. 18 crores from Thermax during the period 1995 to 2004. Because of this fact much emphasis was given from the side of the appellant that the activity of investment and earning dividend therefrom was the core activity through which the assessee-company has generated significant investible corpus. In support of this basic contention our attention was drawn on some of the clauses of memorandum through which the company is authorized to hold by way of investment in shares, stocks and debentures though the assessee is also authorized to deal in shares as also to hold such stocks. However, it was emphasized that the distinction or bifurcation in two types of holdings is also visible from the accounts; specifically classified in the books of account under the head "investment" and second, that have not been classified in the books as "stock-in-trade". An another aspect has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be his independent decision. The investments, therefore, are in the custody of the custodian i.e. Portfolio Manager who does follow up for bonus shares, rights issue and receipt of dividend etc. There is a long list of investment strategy to be followed by the Portfolio Manager. In this regard, our attention was subsequently drawn on one of the clauses that shares are continued to be held for over one year on an average basis; that the large investments are preferred which are always on delivery basis and not on speculative basis, therefore, the predominant objective was stated to be to create wealth in long term basis and to earn maximum profit out of those investments. 13. An another undisputed fact, stated to be important and claimed to be supported by several precedents was that there was no borrowings and all the investments of the assessee company were made out of own funds. Through accounts and annexure the appellant has specifically tried to establish that the investments were primarily out of the corpus as well as out of the accretion in the capital of the assessee company. 14. In the background of the above discussions and considering the facts narrated before us as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal asset. A "short term capital asset" is defined in section 2(42A) means capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer. However, a proviso is attached to the said section which says that in case of a shares held in a company the provision of this clause shall have effect as if for the words of 36 months the same substituted with the words 12 months meaning thereby shares of a company held by an assessee for not more than 12 months are short term capital asset and if the period of holding is more than 12 months shall fall in the category of long term capital asset. 14.3 Though these two definitions govern the method of taxing a transaction of an asset conducted by the assessee but these two definitions are independent of the primary definition of "business" as defined in section 2(13) as follows : "2(13) "business" includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture" 14.4 Therefore, the word "business" as defined is of wider import and can be said to be that the underlined idea is exploitation of trade, commerce, manufacture activities in a co....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Board has further clarified that in case of holding these two portfolios the assessee may have an income under both the heads i.e. "capital gain" as well as "business income". In that manner, the Board has concluded that the Assessing Officers are advised to determine the character and the nature of an investment in the light of the cited decisions and advised not to resort to a single principle to arrive at a conclusion. 15. To start with few precedents as cited before us, we think it necessary to quote one of the landmark decision on the subject way back decided by the Hon'ble Supreme Court in the year 1969 in the case of Raja Bahadur Kamakhya Narrain Singh v. CIT [1970] 77 ITR 253 but the principles laid down therein had a far reaching effect therefore still allowed and regularly cited for the purposes of "It is fairly clear that where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realization of the investment but an act done by making profits. The distinction between the two types of transaction is not always easy to make. Whether the tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on is reproduced below: "We next come across another expression, which is far more difficult to comprehend than the one that we were considering til now. Section 23A speaks of the business of "holding of investments". Here comes the enigma. It is easier to understand when the section speaks of a company having the business of dealing in investments though to say that the company is dealing in investments may, at first sight, look somewhat incongruous. When the legislature spoke of dealings in investments. It mean dealing in shares, stocks and securities, etc. But when a person invests in the shares of some of the companies, it is difficult to say that his business is one of investing. In commercial circles investing is not considered as business. An investor may feel perplexed if he is called a businessman." 17. Referring to the judgment of Hon'ble Supreme Court in the case of Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547, it was observed that an individual can invest in shares for the purpose of earning dividend and such an investment cannot be meant to carry on a business and the only way to tax is if investor himself has converted the shares so acquired into the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e earlier stages also, this problem was posed before the Tribunal and vide judgment in the case of Reva Investment (P.) Ltd. v. ITO [1990] 35 ITD 90 (Ahd.), a reference was made of landmark judgment in the case of H. Holck Larsen (supra) and relying upon the said judgment, an observation was made that accretion to capital does not become income merely because the original capital was invested in the expectation that this, in due course of time, may rise in value. On consideration of the facts of that case it was found that the assessee was an investment company and by its very nature and by looking at the acquisition of various assets to earn interest income therefrom, in that sense of matter, undertaking was not held as an adventure in the nature of trade. 21. As far as question of the two distinct activities carried on by one assessee one trading in the shares, another investment in the shares; has also been decided by the Bombay Benches in the case of Gopal Purohit v. Jt. CIT [2009] 20 DTR (Mum.) (Trib.) 99 though wherein the activities were carried out simultaneously. The judgment says that it is important to notice that the assessee has entered into two different types of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity. 24. One more aspect as emerged is that the transactions were on delivery basis and not speculative in nature i.e. without taking the delivery. In the present case, the badla transaction and the speculative transactions have been specifically forbidden as per the mutual agreement, nevertheless the significant aspect is that the decision to buy and sell was not dependant upon investor i.e. the assessee-company but ultimately the choice and the decision was entirety of the Portfolio Manager. This distinction of self-governed business activity vis-a-vis activity of some one else who is at the helm of affairs can be said to be a vital significance. The subtle distinction such intricate issue. In this situation when neither the purchase nor sales are decided by the assessee but for that purpose the Portfolio Manager is assigned, then the term "dealing" cannot be attached with the assessee. Facts have revealed that the Portfolio Manager is empowered to decide what is to be purchased and what is required to be sold in the market as also the time of transaction, which is a core factor in this business; is altogether under the control and supervision of the Portfolio Manager. As we h....