Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income Tax,, ... vs M/S. Tanmarg Investment And Trading Co ... on 13 March, 2019
आयकर अपील य अ धकरण] पण
ु े यायपीठ "बी" पण
ु े म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE SHRI ANIL CHATURVEDI, AM AND
SHRI PARTHA SARATHI CHAUDHURY, JM
आयकर अपील सं
. / ITA No.428/PUN/2017
नधा रण वष / Assessment year : 2012-13
The Dy. Commissioner of Income Tax, .......... अपीलाथ /
Circle - 7, Pune.
Appellant
बनाम v/s
M/s. Tanmarg Investment and .......... यथ /
Trading Co., Pvt. Ltd.,
Respondent
1st Floor, Shangrilla Garden,
Opp. Bund Garden,
Pune - 411 001.
PAN : AAACT7585L.
Assessee by : Shri C.H. Naniwadekar.
Revenue by : Shri Sanjay Pungalia.
सन
ु वाई क तार ख / घोषणा क तार ख /
Date of Hearing : 27.02.2019 Date of Pronouncement: 13.03.2019
आदे श / ORDER
PER ANIL CHATURVEDI, AM :
1. This appeal filed by Revenue is emanating out of order of Commissioner of Income-Tax (A) - Pune - 5, Pune dated 14.10.2016 for A.Y. 2012-13.
2. The relevant facts as culled out from the material on record are as under :-
Assessee is a company stated to be engaged in the business of investment and trading in shares of companies and units of mutual funds. Assessee electronically filed its return of income for A.Y. 2012- 13 on 29.09.2012 declaring total income at Rs.26,85,524/-. The 2 case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dt.20.03.2015 and the total income was determined at Rs.91,29,910/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who vide order dt.14.10.2016 (in appeal No.PN/CIT(A)-5/Dy.CIT, Cir-7/9/2015-16) granted substantial relief to the assessee. Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us and has raised the following grounds :
"1. On the facts and circumstances of the case and in law the learned CIT(Appeals) erred Treating of income of Rs.82,24,637/- as Capital gains against the claim of the Assessing Officer to treat the same as income from business.
2. On the facts and circumstances of the case and in law the learned CIT(Appeals) erred holding the activity of transaction in shares / mutual fund by engaging PMS was an investment activity and resultant gain was assessable under the head "Capital Gains".
3. Both the grounds being inter-connected are considered together.
4. During the course of assessment proceedings, AO noticed that during the year assessee had transacted heavily in shares through DSP Merrill Lynch Fund Managers, Portfolio Management Service Provider (PMS) and the income earned through PMS was shown as income from capital gains. Assessee also earned income from investments in mutual funds. On perusing the agreement entered between the assessee and DSP Merrill Lynch Fund Managers, AO noted that Portfolio Manager acts in fiduciary capacity as Trustee and Agent of the assessee. He was of the view that the organized activity that was carried out by the assessee through Portfolio Services of investing in shares was a business activity. The submissions of the assessee as to why the transactions through PMS providers be treated as capital gains was not found acceptable to the AO. He therefore held that the profits earned by the assessee on investments made through PMS providers amounts to "income from business and profession". He accordingly 3 treated the capital gains on share transactions of Rs.82,24,361/- as income from business. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who following his predecessor's order in assessee's own case in A.Y. 2010-11 decided the issue in favour of the assessee by holding that the activity of the share transactions through PMS to be an investment and the resultant gain being assessable as "capital gains". Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us.
5. Before us, Ld.D.R. supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before AO and Ld.CIT(A) and further submitted that Ld.CIT(A) while deciding the appeal in assessee's favour had relied upon the order of his predecessor for A.Y. 2010-11. He submitted that against the order of Ld.CIT(A), Revenue in A.Y. 2010-11 had carried the matter before the Tribunal. The Tribunal vide order dt.18.04.2018 in ITA No.378/PUN/2016 has dismissed the appeal of Revenue. He placed on record the copy of aforesaid order and pointed to the relevant findings. He further submitted that since there are no change in the factual position in the facts of the case for the year under consideration and that of earlier year and therefore no interference to the order of Ld.CIT(A), is called for.
6. We have heard the rival submissions and perused the material on record. The issue in the present ground is about the treatment of capital gains earned from share transactions by engaging PMS to be an investment activity or capital gains. We find that identical issue arose in assessee's own case in A.Y. 2010-11. We find that the Co-ordinate Bench of the Tribunal has decided the issue in favour of the assessee by observing as under :
4"5. Before us, at the very outset, Ld. Counsel for the assessee submitted that earning of profits on purchase and sale of shares employing the services of Portfolio Management Services is taxable under the head capital gains. Further, Ld. Counsel submitted that, on similar facts, the Pune Bench of the Tribunal has decided number of cases treating the said income as capital gains only. Before us, Ld. Counsel for the assessee filed the order of Pune Bench of the Tribunal in the case of Yugmarg Investment & Trading Pvt. Ltd. Vs. DCIT - ITA No.310/PUN/2015, dated 12-05-2017 for the A.Y. 2008-09. Ld. Counsel for the assessee submitted that the decision is relevant for the similar proposition. The said decision was delivered relying on the decisions of Pune Bench of the Tribunal in the case of KRA Holding & Trading Pvt. Ltd. Vs. DCIT dated 31-05-2011 and Shri Apoorva Patni Vs. ACIT, dated 21-06-2012.
6. Ld. DR for the Revenue relied on the order of the AO dutifully.
7. We heard both the parties and perused the orders of the Revenue on this issue and the decisions relied on by the assessee. We proceed to extract the finding of Tribunal in the case of Yusmarg Investment & Trading Pvt. Ltd. (supra) and the same reads as under :
"8. We find that similar issue had come up before the Co-ordinate Bench of the Tribunal in the case of Shri Apoorva Patni Vs. Addl. Commissioner of Income Tax (supra). The Tribunal in the said case after considering the decisions rendered in the cases of KRA Holding & Trading P. Ltd. Vs. Dy. Commissioner of Income Tax (supra) and ARA Trading & Investments P. Ltd. Vs. Dy.
Commissioner of Income Tax (supra) held that the profit arising on investment carried out by the assessee through PMS does not result in gain assessable under the head business income. The relevant extract of the findings of Tribunal are as under :
"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 & Investments (P.) Ltd. (supra) and KRA Holding & 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 & Investments (P.) Ltd. (supra) and KRA Holding & 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 5 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 separately shown by the appellant, the sales turnover was 73.21 crores involving 76 scrips. This shows that in the share trading business activity, the turnover was almost 4 times higher even though the number of scrips were only marginally high. It was emphasized that in the trading activity even though the shares involved were proportionately much less as compared to the turnover, since the intention was to carry on business activity, the same was shown under the head Business income'. It also included speculative transaction and day trading, whereas no such transactions were entered into by the PMS. The appellant has also emphasized that i was prudent investment activity of the PMS to buy a target quantity of a particular scrip in small lots for averaging purpose; and it should not be treated as frequent and repetitive transactions. The appellant then goes on to cite the decision of the ITAT, Mumbai Bench in the case of Janak S. Rangwala, 11 SOT 627 in which it was observed that mere volume and magnitude of transaction will not alter the nature of transaction if the intention was to hold the shares as investment and not as stock in trade.
Similar explanation has been given once again by the letter dt 14.6.2010 by the appellant in response to the AO's report.
"We have examined the position, in particular the analysis made out by the Commissioner of Income-tax (Appeals) in the extracted portion with reference to the statement and transactions which have been placed n the Paper Book filed before us. In 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 Incometax (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 exdividend 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 6 the dates of the shares becoming ex-dividend on 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 ex-dividend date was 22.12.2005; i.e. the sale was made more than 3 months before the shares became exdividend. 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 particular sale dates mentioned when the scrip was transacted by DSPML, were 24.3.2005 and 16.11.05, whereas the ex- dividend date has been mentioned as 29.3.2006. It cannot therefore be said that the appellant had knowingly sold the shares after declaration of the dividend before it became ex-dividend. Again in respect of shares of Jet Airways, the exdividend date has been mentioned as 14.9.2005 by the AO, and the date of sale has been mentioned as 17.10.2005 and 23.1.2006 in the case of two different PMS's. This instance points out to a wrong conclusion by the AO as here the shares have been sold after those have become exdividend. Coming to two more instances pointed out by the AO in this chart, shares of Nalco have been sold on 30.3.2006 which was after the ex-dividend date of 23.9.2005; and the sale of ONGC shares by DSPML was made on 30.12.2005, which also is after the ex-dividend date of 1.9.2005. It is, therefore, clear that the instances pointed out by the AO did not support this argument, except in the case of two or three instances, where the sale has been made just before the shares becoming ex- dividend; and there was a possibility that the dividend would have been declared and known to the PMS. However, such instances are few and far between; and it cannot lead to a conclusion of indulging in a business activity. Moreover, as has been explained elsewhere by the appellant, such day to day decisions regarding purchase and sale of particular scrips are not that of the appellant, but of the portfolio manager 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."7
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 there 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 income, which cannot be justified. On the other hand, depending on the market conditions, vis-a-vis the analysis of the fundamentals of particular scrip, decision may have to be taken to exit at a particular point of time, and to re-enter after a few months on change of fundamentals. This does not mean that it was in the nature of repeated trading activities in the same commodity; in which case there could be multiple repetitions within a few days; or even during the same day."
14. In this context, we find that the Assessing Officer has treated even the gain on investments held for more than 12 months also as business income. Quite clearly as per the statement in respect of gains and investment in shares through PMS provider placed at page 73 of the Paper Book, the holding period goes upto even 18 months before the investment was liquidated. Be that as it may, the factor of period of holding cannot be ascribed to the assessee, inasmuch as it has no control on such decision making in a Discretionary PMS arrangement, because such decisions are taken by the PMS provider as we have observed earlier. In any case, in so far as the present case is concerned, the Investment Objective of the assessee mandated to the PMS provider was to achieve growth prospects and the actuality of transactions carried out by the PMS provider in order to achieve the stated Investment objective of the assessee cannot be made a basis to charge the assessee of having a different objective. Considering the aforesaid matters, we, therefore, 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 8 PMS provider do not result in a gain assessable as business income.
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.
" 9. The ld. DR has neither been able to distinguish the above decision of the Tribunal, nor has he brought on record any contrary decision. Thus, in view of the facts of the case and the decisions of Co-ordinate Bench, we do not find any merit in the appeal of the Department. Accordingly, the same is dismissed."
Considering the settled nature of the issue, we confirm the order of CIT(A) holding the activity of purchase and sale of shares by engaging PMS constitutes an investment activity and the resultant gain/loss is assessable under the head capital gains. The ground raised by the Revenue is dismissed."
7. The aforesaid decision of the Tribunal has not been set aside, stayed or over-ruled by Higher Judicial Authorities. Before us, Revenue has also not placed any material on record to point out any distinguishing feature in the facts of the present case and that of earlier year nor has placed any contrary binding decision in its support. We therefore following the decision of Co-ordinate Bench of the Tribunal in assessee's own case in A.Y. 2010-11 and for similar reasons find no reason to interfere with the order of Ld.CIT(A) and thus the grounds of the Revenue are dismissed.
8. In the result, the appeal of Revenue is dismissed.
Order pronounced on 13th day of March, 2019.
Sd/- Sd/-
(PARTHA SARATHI CHAUDHURY) (ANIL CHATURVEDI)
या यक सद!य / JUDICIAL MEMBER लेखा सद!य / ACCOUNTANT MEMBER
पण
ु े Pune; दनांक Dated : 13th March, 2019.
Yamini
9
आदे श क# $ त&ल'प अ(े'षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. CIT(A)-5, Pune.
4. Pr.CIT, Pune-4, Pune.
5. "वभागीय %त%न&ध, आयकर अपील य अ&धकरण, "बी" / DR, ITAT, "B" Pune;
6. गाड- फाईल / Guard file.
आदे शानस ु ार/ BY ORDER,स // True Copy // व/र0ठ %नजी स&चव / Sr. Private Secretary आयकर अपील य अ&धकरण ,पुणे / ITAT, Pune