Radials International vs. ACIT; (Del); ITA No. 485 of 2012 dated 250-04-2014: For the A. Y. 2006-07, the assessee had offered longterm and short-term capital gains on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The Assessing Officer held that as the transactions by the PMS manager were frequent and the holding period was short, the gains were assessable as business profits. The Tribunal upheld the view taken by the Assessing Officer.
On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:
“i) The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit;
ii) T he 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 money;
iii) A long 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 trade.
iv) T he 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.
v) O n facts, the sources of funds of the assessee were its own surplus funds and not borrowed funds. About 71% of the total shares have been held for a period longer than six 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.
vi) T he fact that an average of 4-5 transactions were made daily, and that only eight transactions resulted in a holding period longer than one year is not relevant because the number of transactions per day, as determined by an average, cannot be an accurate reflection of the holding period/frequency of the 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.
vii) T his Court is thus of the opinion that the learned 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.”
