In this case, assessee gave her funds to the PMS Manager as in investment and there is no involvement of assessee in day to day transaction of the funds. The result of profit and loss in the end of the year from PMS Account is a capital loss. In earlier year assessee was dealing in shares from her own firm. The same activity was also carried out during the year. Along with some share transactions were considered as part of the business activities and loss of PMS Account was also considered as part of the business activity. Whereas looking the facts and circumstances of the case such income cannot be a business income where assessee has least role to play in day-to-day transaction of funds.
Full Text of the ITAT Order is as follows:-
This is an appeal by the assessee directed against the order of the Commissioner of Income Tax(Appeals)-XVI, Ahmedabad, dated 11/03/2013 for the Assessment Year (AY) 2009-10.
2. Assessee has taken following Grounds of appeals:
i. The learned CIT(A) erred in law and on facts in concluding that return of income for the A. Y.2009-10 was filed late by the appellant u/s. 139(4) of the Income Tax Act, 1961 despite the fact that the appellant, who got her books of account audited u/s. 44AB of the Income Tax Act, 1961 had filed her return of income on 22/09/2009 i.e. before the due date 30/09/2009 u/s. 139(1) of the Act in the light of his own finding that the loss incurred by the appellant was under the head “Business & Profession”.
3. The relevant facts as culled out from the materials on record are as under:-
During the course of appellate proceedings, the appellant has filed a written submission which is reproduced as under:-
“ In continuation of submission dated 16-01-2012 your appellant hereby submit before Your Honour that he has also done share trading business through Angel Broking Ltd. Emkay Global Financial Services Ltd H.D.F. C.PMS A/c. Your appellant has also started during the year under consideration. Reliance Capital Asset Management, Reliance Portfolio Management and Reliance PMS A/c. working on Pool A/c. basis and not run on individual basis. Under PMS as per SEBI the term ‘Portfolio’ means a collection of securities owned by an investor. It represents the total holding of the securities belonging to any person. ‘Portfolio Manager’ means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client [whether as a discretionary Portfolio Manager or otherwise] the management or administration of a portfolio securities or the funds of the client as the case may be. From the definition of ‘Portfolio Manager’ it is clear that portfolio manager acts like an agent who buys and sells shares on behalf of the Individual. The portfolio manager devotes sufficient time in reshuffling the shares on hand in line with changing dynamics of the market It prevents holding of dormant or stocks of depreciating value. The PMS provides the skill and expertise to steer through the complex volatile and dynamic conditions of the market. A portfolio manager proceeds systematically to manage on an ongoing basis the collection of securities in his custody, in tune with market variations to optimize his returns in the process. He carries out regular follow-up trading operations, selling securities on hand and or buying new items of securities based on the sentiments and movement of stock market. He chooses to buy securities when market is bullish and sells those securities when it turns bullish. This enables him to secure considerable profits as a result of value addition to his holding.
Under PMS a person deposits the money under the contract for a period normally not less one year. After depositing the money the investment in securities is left to the choice of the portfolio manager.
The assessee has no control either on selecting the securities or the period of holding. The portfolio manager normally gives the account quarterly on the basis of which the investor comes to know about the profit earned and the securities in which the transactions were done by the portfolio manager on behalf of the assessee. The shares purchased and sold are credited and debited to the DEMAT account of the party, which remains in the control of portfolio manager. It is the portfolio manager who can only deal with the DEMAT account of a particular person. At the time of depositing the amount the assessee will definitely make entry in his books of account as investment in PMS. But he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. The portfolio manager charges his fee for the services rendered and other expenses incurred on the same lines as is done in a case where the agent charges from the his principal. Since the assessee comes to know about the purchase and sale of shares under PMS after the expiry of a period of three months, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of year the shares available in the DEMAT account can be entered. Therefore, at the time of deposit of amount, the intention of the assessee was to maximize the profit. The purchase and sale of shares under PMS was not in the control of the assessee at all. Therefore, it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The portfolio manager has carried out trading in shares on behalf of his clients to maximize the profits, Therefore, it cannot be said that shares were held by the assessee as investment.
3. During the year under consideration, your appellant has made:
a) share trading transactions done through HDFC PMS in a value more than 40 lacs.
b) 375 share transactions done through Reliance PMS.
c) Another 599 share transactions done through Reliance PMS.
d) HDFC PMS portfolio Daily Average of Rs. 1,60,70,490/-.
e) borrowed funds cl. Balance of Rs. 1,48,44,500/-at the end of the year part of the said money which is used in share trading business.
f) Maintenance of two separate A/c. Investment in Shares as as “Invesment” and Trading of shares as ‘Stock in Trade’ and showing short term/long term capital gain on shares shown under the Head Investment” and showing business profit/loss on trading of shares as “stock in trade” in subsequent years i.e. in A.Y. 2009-1 0. 2010-11 and Trading A/c. P & L A/c. B/sheet for the period 1-4-08, 31-03- 09. 1-4-09 to 31-3-10, 1-4-10 to 31-3-1 1 are enclosed herewith. Annex. A
g) Ignoring the CBDT Circular No.4 of 2007 dated 15-6-2007 which is squarely apply to your appellant considering as trading of shares as your appellant’s intention to purchase the shares was solely and exclusively with intention to resell at a profit and your appellant has no intention of holding the shares for himself or otherwise enjoying or using it for long term period. Moreover, your appellant had dealt with heavily and extensively in shares and securities during the year under
Your appellant had made investment under PMS. The profit has not arisen directly from the deposits made but from the securities purchased from such deposits, which were traded by the portfolio manager on behalf of the assessee. The quantity of share traded is huge as is evident from the list appended with the assessment order. The shares have been traded frequently with a motive to maximize profit and not with a view to hold them as investment. The volume of the transaction is very high. All these facts indicate that the portfolio manager had in fact done trading on behalf of the assessee. There is no difference between similar transactions carried out by an individual in shares find the transactions carried out by portfolio manager. Such transactions can be compared with trading in commodities or real estate. If an assessee gives money to a property dealer with the instructions to purchase, get possession and sale at a reasonable profit keeping in view the market conditions. The property dealer acting as an agent enters into series of transactions of purchase and sale earns profit in some of the transactions and incurs loss in some of them. The property dealer after charging, his commission and expenses will hand over the amount together profit to the principal. Can the profit earned or loss incurred on such transactions be treated as capital gain or loss. The answer is no. Therefore, the profits arising on purchase and sale of shares are in the nature of business and not as investment which your appellant has correctly shown as business while filing the return of income. Your appellant rely of the decisions of:
a) AHMEDABAD ITAT ‘B’ Bench decision in the case of Dr. Ajay Ranka. Baroda vs. Department of Income-tax and Seema Ajay Ranka vs. Department of Income-tax. Zerox copies of both the judgments are enclosed herewith. Annex. A1
b) ITAT Delhi Bench decision in the case of M/s. Radials International Vs. A CIT, Circle 2 7(1), New Delhi. Zerox copy of the said judgement is also enclosed herewith. Annex. B
c) ITAT Hyderabad Bench ‘A Asstt. Commissioner of Income-tax Anilkumar Jain. Annex. C
d) ITAT Indore bench, Indore Shri Anurag Vijayvargiya vs. Asstt. Commissioner of Income-tax
5. Both on factual and legal grounds, no case is made out for considering the financial as well as share trading transaction as short term capital gain/loss considered by the learned Asstt. Comm. of I. tax and rejecting the audit report made u/s.44AB of the I.T. Act and not giving c/f of business loss and short term capital loss and therefore your appellant prays that the order passed by the learned quashed AO be quashed and accept your appellant’s return filed as under: –
|Rs. Net loss shown as per Trading Account Loss:||42,57,946/-|
|Add: Disallowable : D’mat Charges & Non Business exps.||1,13,236/-|
|Total Business Loss :||41,44,710/-|
|Short Term Capital loss:||-1,99,206/-|
But learned AO was not satisfied with the contention of the assessee and accordingly addition of Rs.41,44,710/- loss was not allow to be carried forward.
4. Against the said order assessee preferred first statutory appeal before the learned CIT(A) but to no avail and learned CIT(A) dismissed the appeal of the assessee.
5. We have heard both the parties and gone through the impugned In this case, assessee gave her funds to the PMS Manager as in investment and there is no involvement of assessee in day to day transaction of the funds. The result of profit and loss in the end of the year from PMS Account is a capital loss. In earlier year assessee was dealing in shares from her own firm. The same activity was also carried out during the year. Along with some share transactions were considered as part of the business activities and loss of PMS Account was also considered as part of the business activity. Whereas looking the facts and circumstances of the case such income cannot be a business income where assessee has least role to play in day-to-day transaction of funds. As assessee has filed its return after due date that cannot be sole criteria for rejecting the claim of the assessee. In our opinion assessee’s claim for carried forward of loss Rs. 41,44,710/- cannot be rejected. Therefore, we allow the appeal.
6. In the result, appeal filed by the assessee is allowed.