Gain from Portfolio Management Scheme (PMS) not Business Profit – ITAT Mumbai

Transactions carried out via Portfolio Management Scheme are clearly in the nature of transactions meant for maximization of wealth rather en cashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investments made by the assessee are protected and enhanced and in such a circumstance, it cannot be said that Portfolio Management is scheme of trading in shares and stock. Whether, the assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. Where the assessee is engaged in systematic activities of holding portfolio through a PMS Manager, it cannot, by any stretch of imagination, be said that the main object of holding the portfolio is to make profit by sale of shares during the course of maintaining the portfolio investment over the period. The high number of transactions shown in the statement is misleading because these are computer-split transactions and not independent transactions.

The Tribunal’s ruling reiterates the principle that whether the income from sale of shares is capital gains or business income is essentially a question of facts and it is important to analyze the situation from a holistic perspective. While determining whether holding of shares is in the nature of investment or business, the main object of holding shares is to be taken into account. In case the shareholding is in a systematic manner through a portfolio management scheme, it is clear that the investment and divestment in securities is controlled by the portfolio manager and the Taxpayer has no control or discretion with regards to the method or amount of investment, frequency and number of transactions. As held in this decision, availing the services of portfolio management is a factor indicating that the shares were acquired as part of investment and not a trading activity.

ITO Vs. Radha Birju Patel (ITAT Mumbai)
I.T.A No. 5382 Mum/2009, Assessment year: 2006- 07

O R D E R

Per Pramod Kumar:

1. By way of this appeal, the Assessing officer has called into question correctness of CIT(A)’s order dated 22^nd July 2009, for the assessment year 2006-07, on the following grounds:

“1. On the facts and in the circumstances of the case and in law, the ld CIT (A) has erred in directing to treat the STC Gain of Rs. 11,11,063/- as a STC Gain of Rs. 11,11,063/- as a STC Gain instead of business income made by AO in his assessment order, ignoring the fact that :

a) The assessee has deployed her fund with an intention of earning profit of such funds and there was no intention of the assessee to appreciate the investment so made during the year.

b) The assessee has no intention to hold her shares in order to earn regular income out of such purchases.

2. On the facts and in the circumstances of the case and in law, the learned CIT (A) failed to appreciate the fact that the transactions is shown whether by herself or through her agent has to be treated as assessee’s own transaction and the motive behind such transaction was to earn maximum profit and not investment.”

2. The above two grounds of appeal are somewhat inter-connected and, therefore, we take up both the grounds together. Briefly stated the material facts are like this. On 31.10.2006, the assessee filed her income tax returns disclosing total income at Rs. 15,88,890/-. This return was selected for scrutiny under the “Computer Assisted Scrutiny System (CASS)” and during the course of scrutiny assessment proceedings, it was noticed by the Assessing officer that the assessee has disclosed a short term capital gain of Rs. 11,61,751/- and short term capital loss of Rs. 50,688/- in respect of purchase and sales of shares of various companies. The assessee was required to show cause as to why these capital gains should not be treated as business income of the assessee. The explanation given by the assessee was rejected by the AO on the ground that based on CBDT circular No.4 of 2007 dated 15.6.2007, the present case falls in the case of trading in shares. A reference was also made to the Hon’ble Supreme Court judgement in the case of G.Venkataswami Naidu & Co v. CIT (35 ITR 594), wherein, Their Lordships have laid down where purchase has been made solely and exclusively with intention to resell at a profit and the purchaser has no intention of holding property for himself or otherwise enjoying or using it, presence of such an intention is a relevant factor and unless it is offset by presence of other factors, it would raise a strong presumption that transaction is in the nature of trade. It was also noted that dividend earned during the year amounted to Rs. 94,259/-, which clearly shows the intention of the assessee to hold shares only for such period as may enable her encashing the appreciation in its value. It was in this background that the Assessing officer concluded that the assessee was engaged in the business of dealing in shares and, accordingly, gains on sale of shares are required to be treated as income from business and not capital gains. Aggrieved with the stand so taken by the Assessing officer, the assessee carried the matter in appeal before the CIT (A).

3. It was submitted by the assessee that she is a lady that she had no knowledge of trading in shares and stocks that she had invested her surplus funds in shares and stocks for growth and capital appreciation and that she had given her funds to ASK Raymond James for management under their “Portfolio Management Scheme”(PMS). It was also submitted that the business cannot be conducted in such a scheme without any restriction or control on the PMS Manager and that business was always done by the person himself or directly under his supervision. It was also pointed out by the assessee that the shares were invested through Portfolio Management Scheme and in shares under the head “Investments” in its balance sheet and that the Board Circular No.4 of 2007 referred (supra) and the Hon’ble Supreme Court judgement in the case of G.Ventatswami Naidu & G. v  CIT referred (supra) are not applicable on the facts of the assessee’s case. A detailed analysis was then made to the tests laid down by Their Lordships in the case of G.Venkatswami Naidu & G. v CIT referred (supra) and how it was not applicable on the facts of the present case. The same is reproduced below:-

“The said decision relied upon by the AO has laid down certain tests to determine whether a transaction constitutes capital gain or business.

The tests and facts of the assessee’s case are set out hereafter.

1) Was the purchase of the commodity and its resale allied to his usual trade or business or incidental to it?

No –Assessee has no such business

2) What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold?

Investments are made in shares and Mutual funds.

3) Did the purchase, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily re-salable?

No

4) What are the incidents associated with the purchase and resale?

There are no activities of improvement associated with the purchase and resale, etc. Further full payment of the purchase and sale price and it was not a case of the transactions being squared off for the difference.

5) Were they similar to the operations usually associated with trade or business?

No. In fact short term gains are from Portfolio Management Scheme operated by ASK Raymond James.

The assessee has herself only 9 transactions of Long term gain and 2 transactions of short term gains.

6) In regard to the purchase of the commodity and its subsequent possession by the purchaser. Does the element of pride of possession come into the picture?

Not applicable

7) Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assesse or whether they represent borrowed money?

Investments are made from the surplus funds that assessee has and shown as investments in its balance sheet filed with Assessing officer.

Even in respect of the transactions done by the Portfolio Manager, there is only 1 transaction of purchase and sale being in less than 7 days (gain- Rs. 35/-) and only 4 transactions of purchase and sale being in less than 30 days (gain –Rs. 2143/-) all of sale of IDBI (Growth Plan) Mutual Fund.

It is submitted that one does not do trading in Mutual Fund. Complete details of the sale and purchase have been given to the AO who has not made any adverse comment.

The aforesaid clearly indicates that the assessee was not a trader in shares. Hence, the addition, it is humbly submitted, should be deleted.”

4. On taking into consideration the facts of the case as also the submissions so made by the assessee, the CIT (A) reversed the action of the Assessing officer, inter alia, observing as follows:-

“3.8 I have perused the assessment order, written submission and the judicial pronouncements relied in this case from either side. The most formidable controversy arising from the transfer of shares and securities is to determine the exact head of income in which the gains or loss has to be taxed, i.e. the same has to be taxed as business income or capital gains. This issue has assumed greater importance and the tax rate vary considerably under the two heads. The perception of the tax payers and tax authorities about the capital gains or the business income are at times so dramatically opposed to each other that there is effectively no meeting ground between these two extremes.

3.9 However, this case does not have the complexity which ordinarily one encounters while dealing with those of assessee’s who are dealing heavily and extensively in shares and securities. This case is of a lady appellant who is handling administrative and accounting functions in her husband’s office on retailer basis. She has invested her surplus fund in shares and stocks. She has shown it as investment in her balance sheet. She has chosen ASK Raymond James for managing surplus funds in their Portfolio Management Scheme. The aforesaid Portfolio Management Scheme is discretionary and the assessee has no control over it so far as method of investment, number of transaction, etc, is concerned. The business is always conducted by the person himself/herself directly under his/her supervision. The facts in the present case, the lady appellant has invested her surplus fund in a qualified agency. She has done only 9 transaction of LTCG and 2 transaction of STCG. She has also dealt in Mutual Funds. From the totality of the facts, it is obvious that this appellant does not have any hallmark of trade whether in terms of source of deployment of funds, frequency or volume of transaction. Simply because there is amendment in the Act that should not lead to changing of the head if the facts and circumstances do not justify. On the given facts and circumstances of the case, there is no reason for treating Rs. 11,11,063/- shown under short term capital gain as business income. therefore, the order of the AO is reversed and this ground of appeal is allowed.”

The Assessing officer is aggrieved of the relief so granted by the CIT (A) and is in appeal before us.

5. We have heard the rival contentions and perused the record of the case. We have noted that so far as the present transactions are concerned, these transactions are undisputedly carried out by the assessee’s Portfolio Manager and, therefore, these items are clearly in the nature of transactions meant for maximization of wealth rather en cashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investments made by the assessee are protected and enhanced and in such a circumstance, it cannot be said that Portfolio Management is scheme of trading in shares and stock.  Whether,  the assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. In our consideration view, in circumstance, in which the assessee is engaged in a systematic activities of holding portfolio through a PMS Manager, it cannot, by any stretch of imagination, be said that the main object of holding the portfolio is to make profit by sale of shares during the course of maintaining the portfolio investment over the period. As regards the high number of transactions, which have been referred to by the Assessing officer, we have noted, on a perusal of statement filed before us, that the number of transaction reflected in the statement do not constitute independent transaction inasmuch as when, in a computer based trading system, let us say the assessee buy 1000 shares and this purchase is split over 10 transactions from different persons , while over all transactions is of only one purchase 100 shares, the statement reflect of the individual component of the transaction and will thus show a misleading high figure. Keeping it in mind all these factors as also the entirety of the case, we are in considered agreement with the conclusions arrived by the CIT (A) which needs no interference. Grievances raised by the Assessing officer are thus rejected.

6. In the result, appeal is dismissed.

Pronounced in the open court on 30^th November, 2010