THE issue before the Bench is - Whether the mere fact that assessee has availed services of a Portfolio Manager, is sufficient to consider gains arising out of transactions entered into by him as business income. NO is the answer.
Facts of the case
The assessee, an Individual, had shown in his return long term capital gains and loss on sale of shares. Further, short term capital gains and short term capital loss were also shown in the return filed. The AO noted that assessee had been disclosing capital gain from sale of shares every year in past and that purchase/sale of shares and units of mutual funds was managed by Portfolio Managers. It had also noted that assessee had engaged the services of Portfolio Managers to carry out the transactions of sale-purchase of shares for which huge amount of PMS charges were paid. According to AO, it was not an ordinary thing for a normal investor. Thus, AO issued show cause notice to assessee asking him to explain as to why profits on sale of shares/ unit should not be treated as 'business income’ as against the'capital gains’ as claimed by assessee. On appeal, CIT(A) made detailed submissions along with various evidences to justify its claim that assessee had rightly disclosed gain arising on sale and purchase of shares as assessable under the head income from capital gains. It had decided that assessee had made investment in shares and purchase and sale of shares was done as investor, therefore, resultant gain would be assessable under the head of capital gain as had always been accepted by AO in all the preceding years. It was also held that the shares sold through PMS constituted only small portion of total investment and in any case merely because assessee engaged Portfolio Manager, it would not mean that assessee carried out activities would become of the nature of business.
On appeal, the ITAT held that,
++ it is apparent that the assessee had adopted a particular course. He explicitly categorised the amount invested in shares as part of 'investments’ and not as part of 'stock-in-trade’. In our considered opinion, AO’s allegation that assessee did not make 'investment’ into shares but carried it out as business activity merely relying upon factors like volume or frequency of transactions alone, was not in accordance with law and facts of this case. Further, the AO had relied upon the judgment of Delhi Bench ITAT in the case of Radial International to hold that gain arising on sale of shares by availing services of Portfolio Manager shall amount to business income. In this regard it has been brought to our notice that the aforesaid decision has been reversed by the Delhi HC in its order passed on 25th April 2014 2014-TIOL-628-HC-DEL-IT wherein it has been held by their lordships after considering entire scheme of PMS as well as provisions of law that categorization of the transactions whether giving rise to business income or income from capital gains would not necessarily be depending upon the fact that whether purchase and sale of shares are done with the help of Portfolio Manager or not. It was held that PMS agreement is mere agreement of agency and cannot be used to infer any intention to make profit. Thus, the reasoning given by the AO that the impugned income would be assessable under the head income from business merely because the assessee has availed the service of Portfolio Manager is not sustainable in view of the aforesaid judgments and facts of the case before us