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 28 of 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 business
Any 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 BRIEF
Background:
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.
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.