AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 1275
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....CIT(A) has erred in allowing the assessee's claim of Capital Gain Income as against the said income treated by the Assessing Officer as Business Income. 2. On the facts and circumstances of the case, the CIT(A) has erred in not appreciating the AO findings, that the assessee had invested in shares/mutual fund/units through Kotak Securities, Bangalore, through a Port Folio Management Service in a very organized way with an intention to maximize the profit by resorting to frequent trading rather than to hold shares for a long duration." 3. Briefly stated relevant facts of the case include that the assessee availed PMS - Kotak Securities Ltd. for augmenting the value of money and earned gains in the year under consideration. The said gains are offered as income under the head 'Business Income'. However, the Assessing Officer treated the same as 'Capital Gains' and denied the consequential benefits. 4. In the First Appellate proceedings, relying on series of decisions, CIT(A) allowed the appeal of assessee in all the five years as per discussion given in para 5.3 and its sub-paragraphs. Aggrieved with the said order of CIT(A), the Revenue is in appeal before us. 5. At....
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....s / units. The assessee also claimed exempt income on transfer of equity shares / units. On perusal of the chart depicting transactions through Portfolio Management Providers (PMS) the AO observed that the assessee had transacted heavily in shares and mutual funds through PMS and assessee's intention was to maximize profits resorting to frequent trading rather than holding shares for a long duration. A show cause was issued in this regard and the submission made in response was not found acceptable by the AO. The AO after allowing 10% as expenses incurred to earn the gain treated the balance amount as income from business as against capital gains claimed by the assessee. 5.2 AR's SUBMISSION: During the appellate proceeding, the appellant in this connection submitted as below- "TREATMENT OF CAPITAL GAINS AS BUSINESS INCOME The Assessee is a single lady (divorcee) and has one daughter to look after. The assessee has income only from other sources and has not carried out any business of any nature whatsoever in the past. In fact, she is not conversant at all with any business requirements. Earlier also the assessee was a salaried person and has never....
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....stment in mutual fund is made to park surplus funds and achieve a better return. In assessee's case the long term mutual funds are held for more than one year and short term mutual funds also are held for an average period of 6 months. In such a scenario, it cannot at all be said that the assessee is engaged in any sort of business activity in respect of shares and mutual funds. In the past, also, whenever assessee has sold shares and mutual funds, the income was shown under the capital heads and no queries have been raised by the department, and the department has accepted the treatment given by the assessee. We also enclose herewith year wise chart of the transactions entered in to by the assessee. From the same it can be observed that most of the transactions are in mutual funds and are by way of reinvestment in dividend reinvestment plans. Also, most of the transactions are in dividend yielding mutual funds thereby signifying the intention of the assessee to hold it as investments. In respect of transactions in shares there are hardly 8 to 10 scrips which are also held for more than 6 months in most cases. Considering the background of the assesse....
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....s absolute discretion to invest the client's money without any reference to or discretion from the investee. The appellant also contended that the issue relating to PMS activity whether capital gains or business income has been discussed in detail by the Pune Tribunal in the case of ARA Trading and Apporva Patni, thereby enclosing a copy of said order in the submission. The appellant contended that the order of the jurisdictional Tribunal binding upon the AO and the investment should be treated under the head income from capital gains. The AO did not accept the appellant contention inter-alia holding that the transaction was carried out in a professional manner by resorting to frequent trading and the assessee carried out the business of trading in shares in a systematic and organize manner by utilizing the services of PMS to act as an agent. The AO contended that the volume, frequency and regularity with which transaction were carried out by the assessee during all the years indicated that it was a systematic and organized activity with profit motive and therefore, the same should be treated as business income. It was also contended that most of the transaction effected during....
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....act, investment in mutual funds cannot be considered as trading because mutual fund units are not quoted on the stock exchange and are thus not tradable at all. One has to redeem these units with respective fund only. Thus, this is a case of 'subscription and redemption' and not of a 'purchase and sale'. It is common knowledge that investment in mutual fund is made to park surplus funds and achieve a better return. In assessee's case the long term mutual funds were held for more than one year and short term mutual funds also were held for an average period of 6 months. In such a scenario, it cannot be said that the assessee is engaged in any sort of business activity in respect of shares and mutual funds. The appellant, therefore, contended that the income disclosed by her cannot be treated as business income rather the same was rightly treated by the appellant as income from long term and short term capital gains. The appellant also furnished chart showing such transaction in shares. 5.3.2 I find merit in the submission and contention of the appellant. I find that the AO without appreciating the facts relating to holding of shares / mutual funds by the....
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.... 9. The relevant paragraphs of the Tribunal in the case of Shri Apoorva Patni Vs. Addl.CIT (supra) are as under:- "9. We have carefully considered the rival submissions. Ostensibly, in the present case, the transactions in focus are the transactions in shares and securities carried out by the assessee through the PMS provider. Further, as it emerges from the record that in the present case, the portfolio management services engaged by the assessee were in the nature of Discretionary Portfolio Management services. The features of such a scheme have been adequately elaborated by the Commissioner of Income-tax (Appeals) in the impugned order and is also borne out of the copies of a few agreements with the PMS provider, which have been placed in the Paper Book at pages 137 to 183. The Commissioner of Income-tax (Appeals) has brought out the features of the Discretionary Portfolio 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....
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....f the Revenue that the arrangement of appointing a PMS provider to manage the investments was with an intention of a trade, cannot be accepted. 10. In any case, in so far as the very nature of Discretionary Portfolio Management scheme is concerned, the same has already been considered by our co-ordinate Bench in the case of ARA Trading and Investment P. Ltd. and KRA Holding and Trading P. Ltd (supra). According to the Tribunal, the scheme is for an activity of wealth maximization rather than a profit maximization and accordingly, it has been held that gain from such activity was liable to be considered as derived from an activity of investments and not trading. Therefore, on this aspect of the controversy, we find that the Commissioner of Income-tax (Appeals) made no mistake in following the order of the Tribunal in the case of ARA Trading and Investment P. Ltd. and 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 ....
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.... our considered opinion, the inference drawn out by the Commissioner of Income-tax (Appeals) clearly establishes that the volume and frequency of transactions sought to be made out by the Assessing Officer with regard to the impugned activity stands on an entirely different footing and is quite distinct from the activity of trading in shares carried out by the assessee. In fact, it is notable that in the share trading business carried on by the assessee, he has carried out certain speculative and trading activities and that in the case of a PMS provider, such activities are prohibited in law. Having regard to the aforesaid discussion by the Commissioner of Income-tax (Appeals), which is borne out of the record, we, therefore, find no reasons to uphold the plea of the Assessing Officer on the basis of the volume and frequency of transactions. 12. 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 materia....
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....ager since the appellant's case was that of engagement of Discretionary Portfolio Management Services. It was explained that as per SEBI Regulations, there were two types of PMSs i.e. Discretionary and Non-discretionary. It was explained that in case of Discretionary PMS as availed by the appellant, he appellant did not have control on the day to day activities and did not give any directions, except for the broad guideline for not purchasing the shares of Patni Computers Systems Ltd. since it was promoted by the appellant and his family members. It was also explained during the appellate proceedings that in accordance with the Accounting Standard and CBDT Circular, dividend earning was not the only criterion and in any case substantial amount of dividend of Rs. 16,31,796/- was also earned during the year in the investments through the PMS. Thus, this 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 ....
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....ore, are of the view that the objections made out by the Assessing Officer have been adequately addressed by the Commissioner of Income-tax (Appeals) in coming to his findings that the investments carried out by the assessee through the PMS provider do not result in a gain assessable as business income. (underline provided for emphasis) 15. In view of the aforesaid discussion, and having regard to the reasonings extended by the Commissioner of Income-tax (Appeals) with which we hereby affirm, we find that the grievance of the Revenue in this appeal is misdirected and accordingly the conclusion arrived at by the Commissioner of Income-tax (Appeals) on this aspect is hereby affirmed. Thus, on this Ground, Revenue fails." 10. On facts, it is undisputed that the assessee has been consistently employing the services of PMS - Kotak Securities Ltd. for augmenting the value of securities and the same are shown under the head 'Capital Gains'. The pattern of investment is one and the same in this year also. The Assessing Officer disturbed the assessee's claim by treating the said income as taxable under the head 'Profits and Gains from Business or Profession'. On similar....