Taxation Law Analysis on Radials International vs. CIT(A)

TAXATION LAW

Analysis on Radials International vs. CIT(A)

Submitted to: Submitted by:Ms. Monica Suri Angna Dewan- 0056 Indira Reddy- 0036 Shikha Gadkar- 002 Kranav Kapur- 019 Yasharth Misra- 063 Siddharth Kapoor- 069

ACKNOWLEDGEMENT

We would like to express profound gratitude to Ms. Monic Suri, for her invaluable support, encouragement, supervision and useful suggestions throughout this research work. Her moral support and continuous guidance enabled us to complete our work successfully. Her intellectual thrust and blessings motivated us to work rigorously on this study. In fact this study could not have seen the light of the day if her contribution had not been available.

ANGNA DEWAN, INDIRA REDDY, SHIKHA GADKAR, KRANAV KAPUR, YASHARTH MISRA, SIDDHARTH KAPOOR BBA LLAB (H)2011-16

INDEX

. INTRODUCTION CAPITAL ASSETS INCOME FROM BUSINESS AND PROFESSION. BACKGROUND OF THE COMPANY. CASE IN BRIEF. FACTS OF THE CASE IN DETAIL. RELATED CASE LAWS. CONCLUSION

INTRODUCTION:

The case that we have selected to do our project on is Radials International vs. CIT(A), the main issue in the said case was to determine whether investment by the Portfolio Management system is under the head of capital gains or if it comes under the head of income under Business. We have given a brief of the case in the project.

Income under capital gains:The meaning of capital gains is any income arising from tranfer or sale of capital asset.

Capital assets mean property of any kind held by the assessee except:(a) Stock in trade,

(b) Personal effects, being moveable property (excluding Jewellery, archaeological collections, drawings, paintings, sculptures or any other work of art) held for personal use.

(c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.

(d) Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer Bonds.

e) Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt.

Income from Profits & gains of business or profession

Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to taxation. The term "business" includes any (a) trade, (b) commerce, (c) manufacture, or (d) any adventure or concern in the nature of trade, commerce or manufacture. The term "profession" implies professed attainments in special knowledge as distinguished from mere skill; "special knowledge" which is "to be acquired only after patient study and application". The words 'profits and gains' are defined as the surplus by which the receipts from the business or profession exceed the expenditure necessary for the purpose of earning those receipts. These words should be understood to include losses also, so that in one sense 'profit and gains' represent plus income while 'losses' represent minus income.The following types of income are chargeable to tax under the heads profits and gains of business or profession:-Profits and gains of any business or profession. Any compensation or other payments due to or received by any person specified in section 28of the Act. Income derived by a trade, profession or similar association from specific services performed for its members. Profit on sale of import entitlement licences, incentives by way of cash compensatory support and drawback of duty. The value of any benefit or perquisite, whether converted into money or not, arising from businessAny interest, salary, bonus, commission, or remuneration received by a partner of a firm, from such a firm. Any sum whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, franchise, or any other business or commercial right of similar nature or technique likely to assist in the manufacture or processing of good.

BACKGROUND OF THE COMPANY

Radials International" was the first to introduce 'Radial Technology' for Earthmover tyres in India. The core vision of the company at the time of its inception was to promote the then non-existent 'Radial Technology'.

In 1987, the company was appointed as Michelin's 'Sole Technical Consultant for Earthmover Tyres' in India. Along the way, we have successfully introduced the Michelin Radial Technology to every major mining company in India.Radials International has to its credits the following first time initiatives: Introduction of Radial Technology in India. Introduction of novel on-site tyre & operation improvement services. Introduction of the long term Integrated tyre Supply, Service, Repair and Total Tyre Management Systems.

Who is assessee in income tax?Assessee means a person who is being assessed for the purpose of determining tax liability etc.Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any tax or any other sum of money is payable under this Act, and includes - Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or the amount of refund due to him or to such other person; Every person who is deemed to be an assessee under any provision of this Act; Every person who is deemed to be an assessee in default under any provision of this Ac

CASE IN BRIEFBackground:Assessee is a partnership firm, engaged in the business of providing technical, marketing and maintenance services. Assessee offered the profit on sale of shares lying in PMS as capital gains. The AO held that since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade.Commissioner of Income Tax (Appeals) held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made was a mere enhancement of value by realizing a security or a gain made in operation of business in carrying out a scheme for profit-making. It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income. The ITAT upheld the order of the CIT(A), and found the gains to be business income. It held that the nature of a PMS agreement is that it prevents holding of dormant of stocks of depreciating value, and that the PMS is supposed to provide the skill and expertise to steer through the complex volatile and dynamic conditions of the market. Since the ITAT found that the gains were taxable as business income, the exemption of section 10(38) for long term capital gains for shares held longer than 12 months, as well as the claim for concession at the rate of 10% under section 111A on short term capital gains were both denied

CIT(A) Ruling: The CIT(A) ruled that to determine the nature of transactions the intention at the time of purchase and sale and the frequency of the transactions must be taken into consideration. He also stated that since there was not any personal enjoyment or income yielded from the shares that the investment was done for profit making.As the taxpayer was aggrieved by such decision it had appealed to the Income-tax Appellate Tribunal.

Tribunals ruling:

The income tax tribunal upheld the CIT(A)s order and said the following:

- At the time of deposit of the amount with PMS, the intention of the taxpayer was to maximise the profits;- the nature of a PMS agreement is to prevent holding dormant stocks of depreciating value;- the PMS is supposed to provide the skill and expertise to steer through the complex, volatile and dynamic conditions of the market;- while depositing money under the PMS contract, the taxpayer has no control either on selecting the securities or the period of holding;- while the taxpayer records the deposit as an investment in his books, the taxpayer is not aware of the securities in which the money has been invested until the receipt of the quarterly statements from the portfolio manager;- merely because the purchase and sale is delivery based and balance in the DEMAT account is recorded as investment, the fact that trading is done by the portfolio manager would not change;- frequency of sale and purchase of shares indicated trading activity;- Principle of res-judicata is not applicable in case of income tax proceedings, and therefore the AO was not barred to take a view different from his earlier view.-Since the Tribunal taxed the gains as business income, exemption under Section 10(38) of the Act for long-term capital gains and concessional rate of 10 per cent under Section 111A of the Act for short term capital gains were denied to the taxpayer.

High Courts ruling

- The High Court stated that while the portfolio manager had the discretion to invest on behalf of the taxpayer, he did not provide any guarantee about the appreciation of the securities invested in or that he would be responsible for any loss from the deficiency.- From the terms of the PMS agreement, it does not emerge that the intention was to make profits.- If no inference of an intention to invest can be made from the agreement, it does not translate that the intention was to trade for profits.- While a transaction may be motivated by the intention to resell at an enhanced value, it would not be possible to evaluate the nature of such transaction until securities are actually resold.- In a discretionary PMS, intention of the taxpayer ought to be evaluated post the fact of investment and not at the time of depositing the money with PMS.- The nomenclature of a document or deed is not conclusive of what it seeks to achieve, a Court has to consider all parts of it and arrive at a finding in regard to its true effect.- The High Court also referred to the CBDT Circular No. 4 of 2007 determining the tests to apply to determine the nature of such transactions.- The High Court hence concluded that the income from sale of shares through PMS was taxable as capital gains based on the following:- The PMS agreement was merely an agency agreement and cannot be used to infer intention of the taxpayer;- The intention of the taxpayer can be inferred from his conduct, the circumstances of the transaction and not just the seeming motive at the time of deposit;- Factors like substantial nature of the transactions, frequency, volume, etc. must be taken into account to evaluate if the transactions are adventure in the nature of trade;-71 per cent of the shares (which resulted in 81 per cent of total gains) were held for a period of more than six months. This shows that a large volume of shares purchased were intended towards investment; The fact that an average of four to five transactions were made daily and only eight transactions resulted in a holding period of more than one year was not supported as it was held that the number of transactions per day determined by an average cannot accurately reflect the holding period/ frequency of transactions. Further, it was also held that even if a small number of transactions resulted in holding period of more than a year, the number becomes irrelevant if a significant volume of shares was purchased and sold in those transactions.

FACTS OF THE CASE IN DETAILS

1. This is an appeal filed against the order of the Income Tax Appellate Tribunal (ITAT) which upheld the action of the Revenue in treating the profit made by the appellant on sale of equity shares under the Portfolio-Management Schemes (PMS) as business income and not as capital gains, as claimed by the appellant. The question of law that arises for determination before the Court is: whether, the shares invested through a portfolio management scheme, in the circumstances of this case resulted in gains taxable as capital gains or as business income?2. The facts are that the Appellant (hereafter assessee), is a partnership firm, engaged in the business of providing technical, marketing and maintenance services for earth mover, aircraft and truck tyres. It also trades in tyres. For the assessment year 2006-07, the assessee had declared a total income of 3,17,80,943/- on 31.10.2006. The AO, after selecting the case for scrutiny assessment, found on 18.11.2008 that the gains realized by the assessee on sale of shares were in the nature of business income, and not capital gains. The assessee, in its reply to the AO stated that the shares were depicted as investments and not stock in trade in the accounts of the assesse and hence the gains resulting from their sale were to be considered capital gains. The assessee also attempted to produce evidence to show that the intention had not been to earn trading profit: first, the investment was undertaken by the assessee with its own surplus funds, and not borrowed funds, and second, that the holding period for a majority of the transactions was substantial. Moreover, the assesse sought to show that the relationship between the investor (the assessee) and the investment manager (the portfolio manager), as indicated by the agreements entered by Portfolio Management Schemes (PMS), was one of principal and agent. It was also sought to be shown that since the transactions made by the PMS were delivery based, where delivery of the scripts was taken/given on purchase/sale of shares (as reflected in the D-MAT account with the NSDL), the transactions were intended as investments and not adventure in the nature of trade.3. The AO held by its order dt. 30.10.2008 first, that a sum of 51,47,172/- was to be added as business income of the assesse (profits from trade less the PMS charges, treated as expenses wholly and exclusively for the purpose of business), second, that penalty proceedings under Section 271(1)(c) were to be initiated and third, that the claim for rebate under Section 88E, as an alternative, was to fail since no evidence of the Securities Transaction Tax paid was furnished. It was reasoned that the purpose of a portfolio manager was to optimize returns of the investor. Since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade4. The Commissioner of Income Tax (Appeals) (CIT(A))held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made was a mere enhancement of value by realizing a security or a gain made in operation of business in carrying out a scheme for profit-making. It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income.5. The ITAT upheld the order of the CIT(A), and found the gains to be business income. It held that the nature of a PMS agreement is that it prevents holding of dormant of stocks of depreciating value, and that the PMS is supposed to provide the skill and expertise to steer through the complex volatile and dynamic conditions of the market. The order may be extracted in relevant part: 10. 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 port Folio 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 his principal. Since the assessee comes to know about the purchase and sale of shares in the 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 the 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. Merely because the purchase and sale of shares had occurred through DEMAT account on delivery based; it would no change the nature of the transaction. Since the portfolio manager in the capacity of an agent has traded in shares on behalf of the assessee, the profits arising therefrom, will be in the nature of business profits. Further simply because the assessee has treated the deposits made under PMS as investments and balance shares lying in DEMAT account as on the last day of the accounting year under the head investment would not change the character of trading done by the portfolio manager on behalf of the assessee. The shares purchased and sold during the year have not been recorded in the books of accounts as investment nor is it feasible to record as the details were not available with the assesse and the assessee has no control or say as to when and the type of shares or the period of holding of the shares. Therefore in our considered opinion, the transactions are in the nature of business. The decision relied upon by the assessee in the case of Gopal Purohit (supra) is not applicable to the facts of the assessees case.6. The ITAT also observed that the frequency of sale and purchase of shares indicated trading activity. Finally, the ITAT observed that the principle of res-judicata is not applicable in Income Tax proceedings and therefore, the argument that the AO was barred from taking a view different from his earlier view was untenable in law.Since the ITAT found that the gains were taxable as business income, the exemption of section 10(38) for long term capital gains for shares held longer than 12 months, as well as the claim for concession at the rate of 10% under section 111A on short term capital gains were both denied.7. Counsel for the Appellant argued that the transactions must be considered by themselves, while applying the tests to determine whether they are investments or adventure in the nature of trade. It is urged that the PMS agreement, by its terms alone or by the fact of agency being handed over to the portfolio manager, cannot be the basis for inferring an intention to profit or that the transactions are in the nature of trade. The Revenue, on the other hand, emphasizes that the fee paid to the broker is more than the return on the property, thus indicating that the portfolio management scheme itself is one intended to earn profit. Of the total of 1248 transactions that have taken place in the relevant period, the Counsel urges that there were on average, about 4-5 transactions daily, only 8 of which entailed a holding period of longer than 365 days. Thus, it is urged that the order of the Ld. ITAT must be upheld.8. This Court has considered the submissions of both parties. At the outset, it would be pertinent to note some of the relevant terms of the PMS agreement. Clauses 7(b) and 7 (c) of the PMS agreement between Radial and Kotak Securities Ltd. indicate that only in a discretionary portfolio, unlike in a non-discretionary portfolio, the manager has full discretion to invest in respect of the clients account in any type of security, and make such changes in the investments as he deems fit. Clause 18 (b) of the agreement states that the manager shall not be responsible for any loss or expenses resulting to one person as client, from the insufficient or deficiency of value of or title to any property or security acquired or taken on behalf of the client.While the agreement entered into between Radial and Reliance appears to be a discretionary portfolio, as indicated in clause 9 (by which client unconditionally and irrevocably grants power of attorney to the portfolio manager to make decisions on the investments), clause 10 states that the portfolio manager provides no warranty as to the appreciation of the securities in which he applies the clients funds. Therefore, it is clear that a PMS agreement can be an instrument by complete authority and discretion over the transactions to be entered into, is surrendered to the portfolio manager by the investor.9. From the terms of the agreement it does not emerge that the intention of the investor is to make profits. The terms on the other hand, indicate that regardless of the level of discretion handed over to the portfolio manager, there is neither any guarantee that the securities invested in will appreciate nor is the portfolio manager responsible to the client for any loss from the deficiency of value of the securities.Thus, the PMS agreement at best, embodies the intention to appoint an agent with limited liability, who will invest on behalf of the investor and nothing more.10. The Ld. ITAT reasons that at the time of deposit of amount, the intention of the assessee was to maximize the profit because first, while the assessee enters the PMS as investments in the books of account at the time of depositing the money, the assessee does not know what specific transactions will be entered into by the manager, second, that the assessee finds out the details of the transactions only after three months have expired and, only at the end of the year can the shares in the DEMAT account be entered into the books of account, third, the assessee has no control over the shares bought or sold under the PMS and thus the portfolio manager enters into transactions on behalf of his clients to maximize profits. From this, the ITAT infers that it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The reasoning of the Ld. ITAT does not find favour with this Court for three reasons.11. First, the three reasons provided by the ITAT merely convey that intention to hold shares as investment cannot be inferred from the agreement. However, the fact that no inference of an intention to invest can be made from the agreement does not translate to the intention to trade in shares for profit either. As was noted in Raja Bahadur Kamakhya Narain Singh v. CIT-Bihar, (1969)3SCC791 =(1970) 77 ITR 253 (SC):The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue, if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to re sell if an enhanced price could be obtained is by itself not enough but, in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to re-sell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade.12. As indicated here, while a transaction may be motivated by the intention to resell at an enhanced value, it would not be possible to evaluate whether the transaction was actually in the nature of trade, until the securities are actually resold. Moreover, in a discretionary PMS, it becomes all the more relevant and necessary to evaluate the intention of the assessee in conjunction with his conduct and other circumstances, since the intention of the assessee cannot be ascertained at the time of depositing the money in the investment, because the actual sale and purchase of securities happens at the hands of the portfolio manager, a mere agent.13. Second, since the intention of the assessee cannot be ascertained, and the investments are made by the portfolio manager without the knowledge of the assessee/investor in a discretionary PMS, the manner in which the securities have been treated by the assessee can and ought to be evaluated only post the fact of investment, and not at the time of depositing the money. This proposition is supported by the judgment of the Supreme Court reported as CIT-Calcutta v. Associated Industrial Development Company, AIR 1972 SC 445 = (1971) 82 ITR 586 (SC), in which it was held that:it was open to the assessee to contend that even on the assumption that it had become a dealer and was no longer an investor in shares the particular holdings which had been cleared and the sales of which had resulted in the profit in question had always been treated by it as an investment. It can hardly be disputed that there was no bar to a dealer investing in shares. But then the matter does not rest purely on the technical question of onus which undoubtedly is initially on the revenue to prove that a particular item of receipt is taxable. Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge, of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. The assessee can only show that the holdings in question were always treated as an investment (despite having made a profit on clearing them) post the fact of investment. It would also be necessary to acknowledge that the characterization of a transaction, i.e as a portfolio management scheme or investment, itself is not determinative. It is settled law that nomenclature of a document or deed is not conclusive of what it seeks to achieve; the court has to consider all parts of it, and arrive at a finding in regard to its true effect (Ref. Puzhakkal Kuttappu v. C. Bhargavi & Ors AIR 1977 SC 105 and Faqir Chand Gulati, Appellant(s) V. Uppal Agencies Pvt. Ltd 2008 (10) SCC 345). In the income tax law, the position is no different, as can be seen from the judgment of the Supreme Court in CIT Vs. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 (SC), following Duke of West minister (1935) 19 Tax Cas. 490 and Commissioner of Inland Revenue Vs. Wesleyan & General Assurance Society (1948) 16 ITR (Supp.) 101.14. Lastly, the way in which the tests are to be applied was made clear in the CBDT Circular no. 4 of 2007, which states: 8. The Authority for Advance Rulings(AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :-(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;(ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.14. Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade.15. It was also held in P.M. Mohammed Meerakhan v CIT-Kerala, (1969)2SCC25 = (1969) 73 ITR 735 (SC):it is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction...16. Therefore, it is legally untenable to focus singularly on the intention or motive of the assessee without looking at the substantial nature of the transactions, in terms of their frequency, volume, etc.17. This Court thus concludes that:a. The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profitb. The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the moneyc. Along with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade18. Therefore the block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade.19. Coming to the facts of this case, it is not contested that the source of funds of the assessee were its own surplus funds and not borrowed funds. This Court notices from Annexure 4 (p. 90) that the following is the volume of transactions on the basis of holding period.Period of holding< 90 days 90-180 days 181-365 days >365 days Total Quantity of shares 32,750 18,063 38.140 90.649 179,602 Percentage to total quantity18.23% 10.06% 21.24% 50.47% Gain or loss 236,121.87 803,149.68 2,446,125.84 2,217,955.77 5,723,353.16 Percentage of CG/L to total CG/loss 4.12% 14.03% 43.09% 38.75%20. It is clear thus, that about 71% of the total shares have been held for a period longer than 6 months, and have resulted in an accrual of about 81% of the total gains to the assessee. Only 18% of the total shares are held for a period less than 90 days, resulting in the accrual of only 4% of the total profits. This shows that a large volume of the shares purchased were, as reflected from the holding period, intended towards the end of investment. This Court is not persuaded by the argument of the Revenue that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year. This is because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of transactions.Moreover, even if only a small number of transactions resulted in a holding for a period longer than a year, the number becomes irrelevant when it is clear that a significant volume of shares was sold/purchased in those transactions.This Court is thus of the opinion that the Ld. ITAT erred in holding the transactions to be income from business and profession. The order of the ITAT is consequently set aside and the appeal is answered in favour of the assessee.

RELATED CASE LAWS

Smt. Tara Mishra, Lucknow vs Addl.C.I.T.On 11 November, 2014PER A. K. GARODIA, A.M.This is an assessee's appeal directed against the order passed by learned CIT(A)-I, Lucknow dated 20/01/2012 for the assessment year 2008-09.2. The grounds raised by the assessee are as under:"1. Because under the fact and circumstances of the case the court below erred in law as well as on facts in confirming the additions made by the assessing officer.2. Because under the fact and circumstances of the case confirmation of addition of Rs.73,94,350.00 constituting short term capital gains, as income from business is arbitrary, illegal and bad in law.3. Because the assessing officer failed to consider the two portfolios i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock in trade which are to be treated as trading assets and merged the facts of one portfolio with another.4. Because under the fact and circumstances of the case the court below erred in estimating the Annual Rental Value, from two house property as the income from House property at Rs.2,88,000.00.5. Because without prejudice to above even if the assessment orders are to be upheld and the assesses is to be treated as a dealer in shares, he must be given the option of valuing the closing stock of shares on any of the recognized methods."3. It was submitted by Learned A.R. of the assessee that although the grounds raised are 6 but the issues are 2 only. He submitted that the first issue is regarding the income declared by the assessee under the head short term capital gain of Rs.73,94,350/-, which was assessed by the Assessing Officer as income from business and the second issue is that the Assessing Officer has erred in law in estimating the annual rental value from two house property as income from house property at Rs.2.88 lac.4. Regarding the first issue, as per ground No. 1 to 3, he submitted that as per various judicial pronouncements as noted in the written submissions on page Nos. 1 to 6, the income is not assessable as business income and the same was correctly declared by the assessee as income from short term capital gain.HELD In the written submissions from page Nos. 1 to 6, Learned A.R. of the assessee has placed reliance on the same judgments of Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit (Supra) and Nagindas P. Sheth (HUF) vs. ACIT (supra), which are already considered by us and hence, it is seen that in the facts of the present case, none of the judgments is rendering any help to the assessee. As per the facts discussed above, it is seen that the majority sale and majority profit is in respect of those shares, which were held for less than 90 days and therefore, as per the judgment of Hon'ble Delhi High Court cited by Learned A.R. of the assessee having been rendered in the case of Radials International vs. ACIT (supra), such gain is to be assessed as business profit and not as short term capital gain. Hence, as per the above discussion, we decline to interfere in the order of CIT(A) on this issue. Accordingly, ground Nos. 1 to 3 are rejected.

M/s. Equity Intelligence (India) Vs The Assistant Commissioner ofP. Ltd., Income-tax, Circle-1(1), Kochi

These three appeals filed by the assessee are directed against the orders of the Ld. CIT(A)-II, Kochi dated 03-03-2014 for the assessment years 2006-07, 2008-09 and 2010-11.S.P. Nos. 36-38 /Coch/20142. The grievance of the assessee in all these appeals is with regard to treating the sale of shares as business income as against treating the same as capital gains.3. Since the issue is common in all the appeals, the facts of the case as narrated by the CIT(A) for the assessment year 2006-07are that the assessee is engaged in portfolio management service. The return of income for the assessment year 2006-07 was filed on 23-11-2006 declaring income under the head business at Rs.5,17,12,928/-. The Assessing officer completed the assessment on 23-12-2008 at the total income of Rs. 5,17,12,928/-. Subsequently, the Assessing officer re-opened the assessment and completed the assessment under section 143(3) r.w.s 147 on 15-12-2011 at a total income of Rs. 5,17,12,928/- making various additions and disallowances. Aggrieved, the assessee carried the matter in appeal before the CIT(A).4. The assessee also challenged the re-opening of the assessment for A.Y. 2006-07 on the reason that there existed no new material facts which came to the knowledge of the Assessing officer so as to re-open the assessment as there is no reason to believe that the income has escaped assessment. 4.1 The Ld. DR relied on the order of the CIT(A). The Ld. DR submitted that the 'reason to believe has been the matter of judicial scrutiny by the Apex Court S.P. Nos. 36-38 /Coch/2014 in several cases. In the case of Calcutta Discount Co. Lt. vs. ITO (41 ITR 191) (SC), it was observed that it is the duty of the assessee to disclose all the primary facts which have a bearing on the liability of the income earned by the assessee being subjected to tax. It is for the Assessing officer to draw inferences from the facts and apply the law determining the liability of the assessee. In the present case, the Assessing officer had reopened the case as there was under assessment of income u/s. 143(3) with reference to the intimation u/s. 143(1), in the light of assessment made for A.Y. 2008-09, the pattern of purchases of shares and their high frequency was noticed, depreciation seemed to have been wrongly allowed and short deduction of TDS had come to the knowledge of the Assessing officer. Thus, according to the Ld. DR, there existed new material facts that came to the notice of Assessing officer. In light of these tangible material facts that came to the knowledge of Assessing officer, the Ld. DR submitted that the Assessing officer possessed the 'reason to believe' that income has escaped assessment and hence was justified in reopening the case. Accordingly, the re-opening of the case done by the Assessing officer was held valid. Thus, in our opinion, the issue as to whether the assessee has carried out transactions in shares as "trader" or "investor" mainly depends on the intention of the assessee to purchase and hold the shares and such intention has to be gathered from the facts and circumstances involved in each case. There are several aspects which needs to be taken into consideration collectively in order to ascertain the intention of the assessee. In the various judicial pronouncements certain guidelines have been laid down which could be applied to the facts of the given case to ascertain whether the transactions in shares are in the nature of trade or investment. The CBDT has also issued certain guidelines on the similar lines which are helpful to decide the issue as to whether the shares are held by the assessee as stock-in-trade or investment.

CONCLUSION

As states in our project, we believe that the PMS agreement was merely an agreement of agency and it can not be used to infer any intention to make profit. The intentions of an assesse must be inferred holistically, from the conduct of the assesse, the circumstances of the transaction and not just be inferred from the seeming motive at the time of depositing money. Therefore along with the intention of the assessee other crucial factors like the substantial nature of the transactions, frequency, volume etc and thus must be taken into account to evaluate whether the transactions are adventure in the nature of trade.