ITO vs. Radha Birju Patel (ITAT Mumbai)

Gains arising from PMS transactions are capital gains & not business profits

The assessee gave her funds to ASK Raymond James for management under their “Portfolio Management Scheme” (PMS) in the course of which there was purchase & sale of shares of several companies. The assessee earned a gain of Rs. 11.61 lakhs which she offered to tax as short-term capital gains (STCG). The AO assessed the gains as business profits on the ground that (i) as per CBDT circular No.4 of 2007 dated 15.6.2007, the assessee was trading in shares, (ii) the purchase of shares was solely and exclusively with intention to resell at a profit and without an intention to hold the shares, (iii) the dividend earned was meager and (iv) there were a large number of transactions. On appeal, the CIT (A) reversed the AO on the ground that “the PMS was discretionary and the assessee had no control over it so far as method of investment, number of transaction, etc, was concerned”. On appeal by the department, HELD dismissing the appeal:

Transactions carried out via Portfolio Management Scheme are clearly in the nature of transactions meant for maximization of wealth rather encashing the profits on appreciation in value of shares. The very nature of Portfolio Management Scheme is such that the investments made by the assessee are protected and enhanced and in such a circumstance, it cannot be said that Portfolio Management is scheme of trading in shares and stock. Whether, the assessee is engaged in the business of dealing in shares or investment in shares is essentially a question of fact and it has to be determined with regard to the entirety of the circumstances. Where the assessee is engaged in systematic activities of holding portfolio through a PMS Manager, it cannot, by any stretch of imagination, be said that the main object of holding the portfolio is to make profit by sale of shares during the course of maintaining the portfolio investment over the period. The high number of transactions shown in the statement is misleading because these are computer-split transactions and not independent transactions.