ARA Trading & Investments Pvt Ltd vs. DCIT (ITAT Pune)

DATE: (Date of pronouncement)
DATE: June 2, 2011 (Date of publication)

Click here to download the judgement (ARA_trading_PMS_shares_STCG.pdf)

Shares PMS transaction gains are STCG and not business profits

The assessee, engaged in investment in financial instruments, offered short-term capital gains (“STCG”) of Rs. 1.04 crores and LTCG of Rs. 12.57 lakhs. The bulk of the gains arose from a Portfolio Management Scheme (PMS) with ENAM AMC. The AO & CIT (A) assessed the entire gain as business income on the ground that (a) there were a large number of transactions, (b) the assessee had dealt with 5 brokers with 95% of the transactions being with ENAM AMC, (c) there was large volume of purchase and sales in 96 scrips, (d) the only receipts were from share transactions and expenses on bank charges, etc were charged there from. On appeal to the Tribunal, HELD allowing the appeal:

(i) Given the definitions of the term “business” and “capital asset” in s. 2(13) & 2(14), shares, if held for more than 12 months, will be a long-term capital asset, inspite of continued and systematic dealings;

(ii) On facts, as the assessee had engaged a portfolio manager to look after its’ investments and all decisions to buy and sell were taken by the portfolio manager and not by the asessee, the assessee cannot be called a “dealer”;

(iii) The object of the PMS was to maximize the value of the portfolio. It was “wealth maximization” and not “profit maximization”;

(iv) In the balance sheet, the shares were valued at cost and not at lower of cost or market value;

For more on shares PMS see ITO vs. Radha Birju Patel (ITAT Mumbai)

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