Whether portfolio manger is agent who does trading of shares on behalf of client with motive to earn profit, and hence gains attributable to such transactions is business profit and not STCG even if client has shown same as investment - YES: ITAT

: THE issues before the Tribunal are - Whether a portfolio manger is an agent who does trading of shares on behalf of its client with a motive to earn profit, and hence the gain attributable to such transactions is a business profit and not STCG even if the client assessee has shown the transactions as investment in books and the transactions are delivery based - Whether investment in mutual funds is akin to investment made via Portfolio Manager. And the verdict goes against the assessee.

The facts of the case

Assessee firm is engaged in the business of providing technical, marketing and maintenance services for earth-movers tyres and trading in tyres. Assessee filed its ROI declaring LTCG and STCG. During the course of assessment proceedings the AO observed that the assessee entered into numerous purchases and sales of shares, and hence the profits of the assessee were taxable as business income and not STCG or LTCG. The CIT(A) affirmed the order of the AO. In appeal before the ITAT the assessee argued that all the transactions were delivery based transactions and STT was paid on these transactions.

After hearing the parties the ITAT held that,

++ '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 of trading operations, selling securities on hand and or buying new items of securities based on the sentiments and movement of stock market;

++ in case of an assessee, who purchases shares from the market and sells frequently after getting them routed through the DEMAT account. Such transactions will be in the nature of trading activity and the resultant profit will be assessed as business profits. Merely because the shares are credited to DEMAT account at the time of purchase and debited at the time of sale would not make the transactions in the nature of investment. What is important is the intention at the time of purchase, frequency of transactions and volume of the transactions even if he has employed his own funds;

++ it is also a settled law that the principle of res-judicata is not applicable to income tax proceedings. Hence, the assessing officer was not debarred in taking a different view if the earlier view was not in accordance with law. It is also a settled law that the mistake committed earlier should not be perpetuated. Supreme Court in the case of Distributor (Baroda) P Ltd v Union of India has held mistake committed earlier should be rectified. It should not be perpetuated;

++ the assessee 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 and 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 handover 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, in our considered opinion, the profits arising on purchase and sale of shares are in the nature of business and not as investment.