TaxTMI 
TaxTMI 
2012 (9) TMI 1028
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.... the resultant gains under the head capital gains and not as business income as contended by the AO. 3. Facts of the case in brief are that the AO during the course of assessment proceedings observed that the assessee has continued investments in shares and mutual funds through PMS. From the records he noted that the issue regarding treatment of gain in respect of investments through PMS as capital gains or business income has been dealt with in the A.Y. 2007-08 wherein it has been held that the gain in respect of investment through PMS is business profit and it was accordingly taxed under the head "income from business". He observed that although an appeal has been filed before the CIT(A) by the assessee for A.Y. 2007- 08 the same is still pending. The AO, therefore, following the reasonings given in the order for A.Y. 2007-08 treated the gains in respect of investments through PMS as business income and held that the assessee shall be allowed the related expenditure, i.e. PMS fees as deduction. He accordingly computed the taxable income from PMS activities amounting to Rs. 45,01,618/- under the head "income from business" as against capital gains shown by the assessee. 4. I....
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....lio Management services agreement wherein the PMS provider has got absolute independence in taking day-to-day decisions so far as investments in shares etc. are concerned. The PMS provider receives a lumpsum amount from the client and in a Discretionary Portfolio Management service arrangement, and the PMS provider makes the investments as per his own judgment reached on the basis of his own professional expertise and accordingly undertakes day-to-day decisions for purchase and sale of a particular scrip without recourse to the client. It is also evident that such decisions taken by the PMS provider are not client-specific, but is taken for a whole range of clients in his portfolio. No doubt, the PMS provider undertakes these transactions in the name of the assessee and the shares are also kept in dematerialized form in the Demat account of the assessee. So, however, all such activities are carried out in a fiduciary capacity. Having regard to the operating mechanics of a Discretionary Portfolio Management agreement, which is in question before us, the relationship between the PMS provider and the assessee cannot be contemplated as that of a mere agent as understood in the common p....
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....nd KRA Holding and Trading P. Ltd (supra) and in holding that the assessee was indeed engaged in an investment activity while appointing the PMS provider with regard to the stated transactions. 11. In so far as other objections of the Assessing Officer that there was volume and frequency of transactions was large so as to constitute business activity, we find that the factual matrix has been appropriately analyzed by the Commissioner of Income-tax (Appeals) in para 4.20 of the impugned order, which is as under: "So far as volume and frequency of transactions are concerned, it has been explained that actually the number of scrip traded was not very large being 62 across all the 3 PMSs, engaged during the year, which was not much considering that about 2000 companies' shares were actively traded in the stock exchanges. It was also clarified that the frequencies of transactions was not much. Sometimes several transactions may have to be made in the same scrip, which increases the frequency. It was emphasised that the total sales turnover in the investments made through PMS during the year was 19.06 crores involving 62 scrips, whereas, in the share trading business se....
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....The Assessing Officer has also pointed out that earning of dividends was not at all the motive of such transactions, because the shares have been sold just before the same became ex-dividend on the stock exchanges. In this regard, we find that the Commissioner of Income-tax (Appeals) has factually found the same to be contrary to material on record as per the discussion in para 4.15 of the order, which is as under: "4.15 For the proposition that earning of dividend was not the motive, the AO has cited instances when the appellant has sold some shares just before the dates of the shares becoming ex-dividend or the stock exchanges. However, a perusal of the chart given in the assessment order showed that the information regarding date of declaration of dividend has not been given. For example, in the case of scrip of Amtek Auto, the sale was made on 19.9.2005 whereas the exdividend date was 22.12.2005; i.e. the sale was made more than 3 months before the shares became ex-dividend. It does not necessarily follow that the dividend was already declared in this case and still the appellant sold the same before the shares becoming ex-dividend. Similarly, in the case of ACC, two p....
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.... point is adequately explained." On this aspect also, we find no material to differ with the findings of the Commissioner of Income-tax (Appeals), which we hereby affirm. 13. Another aspect made out by the Assessing Officer was to the effect that by its very nature, sales and purchases carried out by the PMS provider was of short-term nature and, therefore, it was to be regarded as a business activity. Factually speaking, on this aspect the Commissioner of Income-tax (Appeals) has dealt with the same in para 4.17 of his order, which is as under: "4.17 The AO also pointed out to some instances when shares of the same company have been repurchased sometimes after the sale. In this connection, it is explained that such instances were not much and there were reasons for churning of the investments by the Portfolio Manager at different instances during the year. It is relevant to notice that the appellant also pointed out that thre were many shares held for a long time, even upto 18 months, by the PMS, and substantial amount of long term capital gain of Rs. 83,09,187/- was also shown. In fact, the AO has treated even this LTCG of Rs. 83,09,187/- as Business in....
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....e the grounds raised by the revenue on this issue are dismissed. 7. Accordingly the revenue appeal was dismissed. Since nothing contrary was brought to our notice against the order of the Tribunal in the connected cases, therefore, respectfully following the order of the Tribunal in the group cases we uphold the order of the CIT(A). Consequently the grounds raised by the revenue are dismissed. 8. In Grounds of Appeal Nos. 11 and 12 the revenue has challenged the order of the CIT(A) in deleting the disallowance of Rs. 5,57,396/- made by the AO u/s.14A of the Income Tax Act r.w. Rule 8D of the Income Tax Rules. 9. After hearing both the sides, we find the AO disallowed an amount of Rs. 5,57,396/- being 0.5% of the average investment of the funds deployed as expenditure incurred for earning tax free dividend income. In appeal the learned CIT(A) deleted such disallowance on the ground that disallowance u/s.14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred or claimed disallowance u/s.14A cannot stand. He observed that the expenditure on PMS has not been claimed by the assessee and therefore t....