Sachin Tendulkar Brings Cheer To PMS Investors In Epic Battle With Income-Tax Dept

Net worth of Rs. 155 crore, partly invested in portfolio of stocks

A careful study of the order of the Income Tax Appellate Tribunal in the case of ACIT 19(3) vs. Sachin R. Tendulkar reveals several important facets of the master blaster’s financial affairs in the financial year 2010-11.

(i) Sachin’s total investments aggregated Rs. 155.17 crore. Presumably, his net worth will be close to this figure. Of this, Rs. 21.73 crore was invested in the portfolio management schemes of four entities, being Kotak securities, DSP Merrill Lynch, ICICI Securities and Reliance Securities.

(ii) Sachin paid the portfolio managers fees of Rs. 52 lakh.

(iii) The performance of the PMS managers has not been very impressive. They reported a long-term capital loss of Rs. 99,13,151 and a short-term capital gain of Rs. 66,83,623.

(iv) Sachin has also been punting on his own. He pocketed long-term capital gains of Rs. 17,79,977 and short-term capital gains of Rs. 24,05,326 from ‘direct investments’.

(v) The heavy long-term capital loss from the PMS (Rs. 99,13,151) wiped out Sachin’s punting gains and compelled him to report a loss of Rs. 81,33,174 from shares held as long term capital assets.

(v) The tax-free dividends were Rs. 6.16 crore.

(vi) Sachin does not appear to be a believer in the philosophy of ‘Buy-n-hold’. His average holding period of stocks that he bought by himself is only 82 days. In contrast, the average holding period of shares under the PMS ranged from 123 days to 174 days.

Sachin Tendulkar is an “investor” and not a “trader”: ITAT

The Income Tax Officer took the preposterous stance that the master blaster is a “trader” in stocks and that his gains are assessable as “business profits” and are not eligible to the tax exemption enjoyed by capital gains.

However, the CIT(A) and ITAT have negatived the ITO’s stand and upheld Sachin’s stand.

“It is clear that the as per law initial choice was with the assessee that whether initial amount invested in the shares was to be treated as part of ‘investments’ or ‘stock-in-trade’. The assessee exercised its choice and kept the same as part of ‘investments’. It is well settled law that a tax payer can very well plan it’s affairs in such a manner so as to minimize the burden of tax so long as no mala fide or bogus practices are followed and tax planning is done by the assessee strictly within the framework of law”, the ITAT held.

It further observed:

“It is apparent that the assessee had adopted a particular course. He explicitly categorised the amount invested in shares as part of ‘investments’ and not as part of ‘stock-in-trade’. In our considered opinion, AO’s allegation that assessee did not make ‘investment’ into shares but carried it out as business activity merely relying upon factors like volume or frequency of transactions alone, was not in accordance with law and facts of this case”.

Far reaching law for PMS investors

The ITAT has laid down a clear-cut principle of law that all gains by PMS investors have to be assessed as capital gains and not as business gains irrespective of the number of transactions undertaken by the PMS manager.

“In our opinion, investment through Portfolio Management Service, which may deal with the shares of the assessee so as to derive maximum profits cannot be termed as business of the assessee but would only be a case of a more careful and prudent mode of investment, which has been done by the assessee. Funds which lie with the assessee can always be invested (for earning higher returns) in the shares either directly or through professionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment which is in shares, and the law permits it to be taxed as capital gains and not as business income”.

Conclusion

We have to compliment Sachin because in addition to supremacy over the sporting arena, he has also shown his mastery in the field of investments, by making huge gains and securing an epic verdict that the gains are tax-free!