The assessee filed her return of income for the assessment year 2006-07 declaring a total income of Rs 13,95,40,653/- under various heads of income, viz. income from house property, business income, capital gains and income from other sources. The income declared under the head capital gains included short term as well as long term capital gain on investments made through the PMS providers. Besides, the assessee has also declared capital gains, both long term and short term, from direct dealing in mutual funds, investments also. Apart from the aforesaid dealings in shares and securities, the assessee also had a portfolio wherein income from share and securities transactions was declared as business income. In this factual background, the Assessing Officer treated the short term as well as long term capital gain earned through the investments made through PMS providers amounting to Rs 3,86,38,849 as income which was liable to be assessed as ‘business income’ and not under the head ‘Capital gains’.
The Commissioner of Income-tax (Appeals) has, however, upheld the contentions of the assessee that the gain from investments made through the PMS provider was assessable under the head capital gains.
- The PMS provider is vested with a lumpsum amount for effecting purchase and sale of shares so as to make profits thereon and that such activity is carried out by the PMS provider as an agent on behalf of his client which, in the present case, is the assessee.
- All the purchases and sales are effected in the name of the assessee, inasmuch as the delivery of the shares are received and given out of the Demat account maintained in the name of the assessee.
- All the transactions carried out through the PMS provider were short term in nature with the motive of selling the shares at higher rates and booking profits thereon;
- Even the fee charged by the PMS provider is a percentage of daily asset value of holding in the account of the client
- PMS provider carries out an organized and systematic activity of transacting in shares on behalf of the assessee which is akin to a business activity.
- Total number of scrips transacted by PMS provider was 62 which shows a high volume of transactions.
- Activities of share dealing which were segregated into business and investment activities. Share trading business whose income was separately disclosed as business income as distinct from investment activity carried out through PMS provider.
- Assessee had carried out the entire activity of making investment through the PMS provider out of own funds and there were no borrowings
- Assessee was also making investments directly in mutual funds to get the benefits of dividend income and appreciation in capital.
- The activity in shares which has been declared as trading activity in comparison would show that there was much lower activity in the PMS investments.
- The PMS scheme under which the assessee invested was a Discretionary Portfolio Management scheme wherein the assessee did not dictate to the PMS provider
- At the time of appointing the PMS provider, the assessee had spelt out the ‘Investment Objective’ which was contained in the Discretionary Portfolio Management Services agreement with the respective PMS provider, which was to achieve a reasonable return over a long term by investing in a focused portfolio of 15-20 stocks with good growth prospects, across various sectors.
- The PMS provider makes the investments as per his own judgment reached on the basis of his own professional expertise and accordingly undertakes day-to-day decisions for purchase and sale of a particular scrip without recourse to the client. It is also evident that such decisions taken by the PMS provider are not client-specific, but is taken for a whole range of clients in his portfolio.
- Reliance is placed on Pune ITAT rulings in the case of ARA Trading & Investments (P.) Ltd.  47 SOT 172 and KRA Holding & Trading (P.) Ltd. v. Dy. CIT  46 SOT 19
- The volume and frequency of transactions with regard to the impugned activity is quite distinct from the activity of trading in shares carried out by the assessee.
- It is notable that in the share trading business carried on by the assessee, he has carried out certain speculative and trading activities and that in the case of a PMS provider, such activities are prohibited in law.
- Depending on the market conditions, vis-a-vis the analysis of the fundamentals of particular scrip, decision may have to be taken to exit at a particular point of time, and to re-enter after a few months on change of fundamentals. This does not mean that it was in the nature of repeated trading activities in the same commodity; in which case there could be multiple repetitions within a few days; or even during the same day
14A Disallowance: Where no expenditure is canvassed to have been incurred by the assessee in earning dividend income, no notional expenditure can be deducted by invoking section 14A of the Act. Further as per the Hon’ble High Court, in a case when assessee has not retained shares with the intention of earning dividend income and dividend income is incidental to the business of sale of shares, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income so as to be disallowed.