PMS Fees not deductible against capital gains. Despite dissenting orders, reference to Special Bench not necessary – ITAT Mumbai

O R D E R

Per R.S.Syal, AM :

This appeal by the assessee is directed against the order passed by the ld. CIT(A) on 31.03.2009 in relation to the assessment years 2006-2007.

2. Initially the assessee raised a solitary ground challenging the impugned order in not allowing deduction of expenses incurred in connection with the earning of short term capital gain. Subsequently revised grounds were filed reading as under:-

“The learned Comm. Of Income tax (Appeals) – 10, Mumbai has erred:-

1. in not allowing the appellant a deduction for expenses incurred in connection with earning of short term capital gains. He erred in not appreciating the nature of these expenses.

2. in not appreciating that the fees so incurred were a diversion of income by overriding title and hence out to have been considered while computing income.

3. in not appreciating that the full value of consideration received had to be computed after deducting the fees which had been incurred and paid.

3. The learned A.R. submitted that the ground taken in the original memo of appeal has been repeated as such as revised ground no. 1 and the ground nos. 2 to 4 are additional grounds which arise out of an articulation of ground no.1. No serious objection was raised by the learned Departmental Representative against the admission of additional grounds. We, therefore, admit these grounds and take up the appeal for hearing.

4. Briefly stated the facts of the case are that the assessee declared gross long term capital gain of Rs. 67,32,921 and short term capital gain of Rs. 91,87,735. Thereafter a deduction was claimed in respect of professional fees / profit sharing fees paid to ENAM Asset Management Co. Ltd. for rendering portfolio management services and the net income from capital gains was determined as under:-

Long term capital gain		Rs.67,32,921
Less: Professional Management fees Profit sharing fees	Rs. 3,05,688 Rs. 10,09,852	Rs. 13,15,540
		Rs.54,17,381

Short term capital gain		Rs.91,87,735
Less: Professional Management fees Profit sharing fees	Rs.  4,17,141 Rs.13,78,044	Rs.17,95,185
		Rs.73,92,550

5. The Assessing Officer observed that the Professional Management fees and Profit sharing fees (hereinafter collectively called as `fees’) paid to portfolio manager was unrelated to any profit or loss under the head `Capital gains’. There is no dispute on the fact that the assessee claimed long term capital gain as exempt, which was duly accepted. The A.O. did not allow deduction for fees of Rs. 17,95,185 claimed by the assessee against the short term capital gain, as it was, in his opinion, not related to the transactions resulting in to capital gain. It was argued before the learned CIT(A) that the assessee was entitled to deduction on account of fees against the short term capital gain, as it was directly related to sale of shares and hence should be taken as expenditure incurred wholly and exclusively in connection with transfer of shares. An alternative argument for considering it as diversion of income by overriding title, was also raised. The learned CIT(A) was unconvinced with the assessee’s submissions. He echoed the assessment order on this point by holding that such charges could not be allowed as deduction u/s 48. Now the assessee has assailed the impugned order in above terms.

6. We have heard the rival submissions and perused the relevant material on record. Both the sides have placed on record copies of the orders passed by the Tribunal in support of their respective stands. The Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari Vs. DCIT [(2011) 50 DTR 369 (Mum.)] [to which one of us, namely, the ld. JM is party] decided the issue against the assessee by holding that the payment of fees by that assessee for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement and was consequently not eligible for deduction in computing capital gain. Thereafter, similar issue came up before the Pune Bench of the Tribunal in KRA Holding & Trading P. Ltd. in ITA No.500/PN/08 etc., in which the Revenue relied on the Mumbai Bench order in Devendra Motilal Kothari (supra). Vide its order dated May 2011 and after considering the case of Devendra Motilal Kothari (supra), the Pune Bench recorded a contrary view in assessee’ s favour. In so deciding, the Pune Bench, inter alia, relied on the judgement of the Hon’ble Bombay High Court in CIT Vs. Shakuntala Kantilal [(1991) 190 ITR 56 (Bom.)]. Once again similar issue came up before the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka Vs. ACIT in ITA No.4501/Mum/2010. Vide its order dated 10.08.2011, the Mumbai Bench considered both the earlier decisions on the point, viz., Devendra Motilal Kothari (supra) and KRA Holding & Trading P. Ltd. (supra). Through an elaborate order, the Mumbai Bench in latter case followed the decision in the case of Devendra Motilal Kothari (supra) in priority over that of KRA Holding & Trading P. Ltd. (supra). In deciding so, the latter Bench observed that the decision of the Pune Bench in KRA Holding & Trading P. Ltd. is primarily based on the judgement of the Hon’ble Bombay High Court in the case of Shakuntala Kantilal (supra), which has been subsequently held to be not a good law by the Hon’ble Bombay High Court in CIT Vs. Roshanbabu Mohammed Hussein Merchant [(2005) 275 ITR 231 (Bom.)]. As the later judgement overruling the earlier judgement was not brought to the notice of the Pune Bench, the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka (supra) chose to follow the decision in the case of Devendra Motilal Kothari (supra), thereby deciding the issue against the assessee. The position discussed above has been fairly admitted by both the sides.

7. From the above discussion it is seen that the first order on this issue was passed against the assessee in Devendra Motilal Kothari (supra). The second order, in the point of time by the Pune Bench in KRA Holdings (supra), decided the issue in favour of the assessee after considering the first order. Third order, being the latest in the point of time in Pradeep Kumar Harlalka (supra), decided the issue against the assessee after considering both the earlier orders. Not only that, the third order also took note of the fact the basis of the Pune Bench order, being the judgment of the Hon’ble jurisdictional High Court in Shakuntala Kantilal (supra), already stood overruled by a subsequent judgment of the Hon’ble Bombay High Court in CIT Vs. Roshanbabu Mohammed Hussein Merchant (supra), which fact was not brought to the notice of the Bench. No other order, in favour of the assessee, has been brought to our notice by the ld. AR. Accordingly it is vivid that the majority opinion (in terms of the number of orders) on the issue and also the latest order (in the point of time) together with the special circumstances of the Pune Bench case (in considering an overruled judgment), bring us to a stage where the current and the majority view taken by the tribunal so far on the point, is against the assessee.

8. The learned Counsel for the assessee vehemently argued that certain important aspects of the matter were not taken into consideration by the Mumbai Benches of the Tribunal in both the cases in deciding the issue against the assessee. It was argued that there was no basis for excluding fees paid by the assessee to his portfolio manager from the computation of income under the head `Capital gains’ as there was no other purpose for its incurring, except in connection with the purchase and sale of shares. Referring to agreement of the assessee with the portfolio manager, ENAM Asset Management Co. Ltd., the learned A.R. explained that the assessee agreed to place a sum of Rs.2.25 crore at the discretion of his portfolio manager, which was to be used for purchase and sale of securities etc. Referring to various clauses about the consideration payable to the portfolio manager, he stated that it was at half percent of the net asset value (market value of assets inclusive of all Securities and cash balances) under management at the beginning of each quarter and further the portfolio managers were entitled to a return based fee calculated at the rate of 20% per annum of the profits in excess of 15% of the profits after deducting all the expenses. The sum and substance of his submissions was that such fees paid by the assessee has direct relation with the income arising from the transfer of shares and hence the same should be allowed as deduction, either by considering it as diversion of income by overriding title from the sale proceeds; or as part of the cost of acquisition of the shares; or alternatively as an expenditure incurred wholly and exclusively in connection with the transfer of shares. These aspects constitute three additional grounds stated to be articulation of the main ground on disallowance of the amount of fees. He relied on certain judgments to drive home his point of view on deductibility of the fees. In this process, he also took us through the judgment of the Hon’ble Supreme Court in CIT Vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC), which has been considered by the Mumbai bench in Devendra Motilal Kothari (supra), to argue that the ratio decidendi of this judgment was not properly understood by the Mumbai Bench in holding that there was no diversion of income.

9. Sounding a contra note, the ld. DR stated that there was no infirmity in the view taken by the authorities below as the fees had no direct relation with the purchase or sale of shares and hence was liable to be excluded from consideration. He vigorously accentuated on the orders passed by the Mumbai Benches and contended that all the aspects now raised on behalf of the assessee, have been already considered and decided against the assessee and there was nothing new to justify going away from the earlier view.

10.  We are not inclined to accept the submissions tendered by the ld. AR that the Mumbai Benches of the tribunal have not properly appreciated the matter in right perspective in deciding the issue against the assessee. It can be easily noticed that the facts and circumstances of the case in question and the two cases decided by Mumbai Benches are similar. It is axiomatic that the nature of services provided by any portfolio manager cannot be materially different, as has been fairly conceded by the ld. AR during the course of hearing. It is further manifest that all the contentions raised before us, being the treatment of fees as cost of acquisition of shares; or expenses in connection with transfer of shares; or diversion of income by overriding title, have been elaborately discussed in these two cases. After considering all the aspects of the issue threadbare, the tribunal has held in both these cases that the fees cannot form part of computation of capital gains u/s 48 and has to be ignored. It is the only issue in the present appeal and the facts are in pari materia with those considered and decided by the Mumbai Benches.

11. The arguments advanced by the assessee on merits are an attempt to persuade us for not following the aforenoted view taken against the assessee. We are not impressed with this argument. Judicial discipline requires that when a particular issue has been decided by a bench, then the subsequent co-ordinate benches should normally follow the same. At the same time, we want to clarify that there are no fetters on the powers of the subsequent benches to doubt the correctness of the earlier order, if they are not convinced with it. Whereas following the earlier decision is a rule, calling into question its correctness is only an exception. Unless there are compelling reasons for not following the earlier view, such as, if it is inconsistent with judgment of the Hon’ble Supreme Court or that of the jurisdictional High Court or earlier decisions of the same rank; or if it is sub silentio; or if it is rendered per incuriam in the sense that it is patently inconsistent with the statutory or settled legal position, the same should be respected and adhered to by the subsequent benches so that consistency in the approach of the tribunal is achieved. The above referred exceptions can be classified into two categories. First, when there is a direct contrary judgment of the Hon’ble Supreme court or that of the Hon’ble jurisdictional High Court on the point, rendered prior to or after the earlier tribunal order, the later Bench would be fully justified in differing from the earlier contrary view and following the higher wisdom. Second, when the subsequent bench perceives earlier view to be rendered per incuriam or sub silentio etc., the right course for it is to make a reference to the President of the tribunal for constitution of a special bench on the point so that the larger bench may consider whether the earlier view is correct or the perception of the latter bench is correct.

12. Ordinarily neither the assessee nor the Revenue can be allowed to reargue the same issue over and over again, when it has already been decided by a co­ordinate bench of the tribunal. If such a course is allowed, then every single repetitive issue would require reconsideration time and again because the aggrieved party would always try to convince the later bench over its point of view. Following the earlier order or making a reference to the special bench depends on the satisfaction of the Bench about the correctness or otherwise of the earlier order and not that on the view point of the aggrieved party. It is only when a subsequent bench, on being seized of the matter, finds itself unable to endorse the earlier view, either suo motu or on the arguments of the parties, that it may make reference for the constitution of the special bench. The party dissatisfied with the earlier view cannot compel the later bench to either take a contrary view or make a reference for the constitution of the special bench. Thus it follows that once a particular view is taken, the subsequent benches of the tribunal become functus officio on that issue, subject to the exceptions discussed supra. Needless to mention at this juncture that the party unconvinced with the tribunal order is not without remedy as the Act enshrines the provisions enabling it to appeal to the Hon’ble High Court against the order and convince it about its stand.

13. We are reminded of the well known latin maxim `stare decisis’, which means to stand by the things decided. It expresses the underlying basis of the doctrine of precedent, which, in turn, means to abide by the former precedent when the same points arises again in litigation. It has got the seal of approval from the Hon’ble Supreme Court in several cases including Union of India VS. Azadi Bachao Andolan (2003) 263 ITR 706 (726,727) (SC). The maxim stare decisis provides that when a point of law has been decided, it takes the form of a precedent which is to be followed subsequently and should not normally be departed from. A decision which is followed for a long time will generally be followed, even though the court before whom the matter arises afterwards, might be of different view.

14. Adverting to the facts of the present case, we find that the issue raised before us has been predominantly decided in the above referred two cases against the assessee after making thorough analysis of the issue, dealing with all the aspects now raised by the ld. AR before us. These cases do not fall into the exceptions, as discussed supra, justifying departure from the earlier view. We are, therefore, not inclined to revisit all the relevant facts and the legal position on it with a view to test the correctness of these orders. Respectfully following the rule of precedent, we refuse to take a contrary view from that expressed by the Mumbai Benches in the afore-noted cases. The disallowance is thus sustained and resultantly the impugned order is upheld.

15. In the result, the appeal stands dismissed.

Order pronounced in the open Court on this 28^th day of September, 2011.

Mumbai : 28^th September, 2011. Devdas*

______________________________________________________

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘C’ BENCH

BEFORE SHRI D.MANMOHAN, VICE PRESIDENT &

SHRI T.R.SOOD, ACCOUNTANT MEMBER

I.T.A. NO. 4501! Mum! 2010 –

A.Y- 2006- 07

Pradeep Kumar Harlalka, 14 Thakur Niwas, 173, J.N.Tata Road, Church-gate, Mumbai- 400 020. PAN: AAAAH 3461 N	Vs.	Asst. Commissioner of I.T., Circle 12(3), Mumbai.
(Appellant)		(Respondent)
Appellant by	:	Shri Divyesh I. Shah.
Respondent by	:	Shri Alexander Chandy, Sr. DR

Date of Hearing: 19/07/2011

Date of Pronouncement:

O R D E R

Per T.R.SOOD, AM:

In this appeal various grounds have been raised but at the time of hearing Ld. Counsel of the assessee submitted that the only following four disputes are involved:

1. The Ld. CIT(A) erred in holding that loss arising out of transaction in Futures and Options before 25/01/06 were in the nature of speculative transactions (arising out of ground No.1).

2. The Ld. CIT(A) erred in confirming the disallowance of

i) Portfolio advisory fee of Rs.6,01,224/- &

ii)  50% of share transaction charges amounting to Rs. 1,17,585/- (arising out of ground Nos.2 & 3)

3. The ld. CIT(A) erred in not allowing deduction u/s.80C amounting to Rs. 30,000/-. (arising out of ground No.4)

2. Issue No.1: After hearing both the parties, we find that during assessment proceedings AO noted that assessee had offered a sum of Rs. 3,27,687/- arising out of F&O transactions under the head ‘short  term capital gains’. AO observed that as per the provisions of sec.43[5][d] profit from transaction in F&O was assessable under the head ‘business’ and not ‘capital gains’. He further observed that a sum of Rs.1,35,889/- on account of loss related to the period before 25-01-2006 and the total gain after that date was Rs.4,63,577/-. Therefore, AO subjected the amount of Rs. 4,63,577/- under the head business income and the loss amounting to Rs.1,35,889/- was allowed to be carried forward as speculation loss. On appeal, action of the AO has been confirmed by the ld. CIT(A).

3. Before us Ld. Counsel of the assessee submitted that this issue is covered in favour of the assessee by the decision of the Tribunal in the   case of Gajendra      Kumar T.       Agarwal         vs.      ITO,I.T.A.No.1798/Mum/10 [copy of the order filed] and by Circular No.3/2006 dated 20-7-2006 wherein in the explanatory notes this provision was explained.

4. On the other hand, Ld. DR relied on the order of the CIT(A).

5. After considering the rival submissions, we find that the issue involved in the case of Gajendra Kumar T. Agarwal vs. ITO [supra] is totally different. However, at the same time this issue is settled in favour of the assessee because most of the Benches have taken a view that the decision of the Special Bench of the Tribunal in the case of Shree Capital Services Ltd. [121 ITD 498] holding that insertion of clause [d] in sec.43[5] is applicable from A.Y 2006-07 and even loss incurred before 25-1-06 should also be reckoned as only business loss. Therefore, we set aside the order of the ld. CIT(A) and direct the AO to assess the net profit from F&O at Rs.3,27,687/- under the head business.

6. Issue No.2: After hearing both the parties we find that assessee had claimed a sum of Rs.2,35,170/- on account of transaction charges under share trading expenses. AO noted that most of the transactions were on account of F&O transactions and, therefore, 50% of such amount was disallowed and the balance of 50% was disallowed. He further found that assessee had claimed portfolio management fee expenses amounting to Rs.6,01,224/- under the head short term capital gains. The AO was of the view that no such expenditure is allowable u/s.48 and therefore disallowed the same.

7. On appeal, ld. CIT(A) observed that as per sec.48 deduction from capital gains would be allowed in a case where the expenditure is incurred wholly or exclusively in connection with the transfer or for the cost of acquisition or cost of improvement thereto. Since the expenditure on account of portfolio management fee was in the nature of revenue outgoing therefore could not be treated as cost of acquisition of asset or improvement and since same had nothing to do with the transfer, same was not allowable.

8. Before us, Ld. Counsel of the assessee submitted that share transaction charges are charged by the brokers and therefore same should have been allowed. However, he could not even given bifurcation as to how much was in respect of F&O activity and how much related to the investment. In respect of the issue regarding disallowance of portfolio management expenses, he mainly submitted that this issue is squarely covered by the decision of the Pune Bench of the Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT [11 Taxman 250]. He argued that this decision has been rendered even after considering the decision of the Mumbai Bench in the case of Devendra Motilal Kothari vs. DCIT [136 TTJ 188] wherein it was held that portfolio management fee is not allowable expenditure u/s.48. This has been distinguished in the light of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Shakuntala Kantilal [190 ITR 56]. Therefore, the issue is covered by the latest decision of Pune Bench in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT [supra].

9. In the alternative the claim for advisory fee and share transaction should be allowed u/s.37[1] while computing the profits and gains from the business and profession. He argued that portfolio advisory fee could also be appropriately apportioned like the shares transaction charges which have been apportioned by the AO © 50% as pertaining to the F&O transactions. This fee should also be apportioned and allowed accordingly.

10. On the other hand, Ld. DR submitted that Pune Bench of the Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT [supra] has used the expression “that expenditure incurred in connection with the transfer of capital assets/securities should be allowed notwithstanding inadequacy of the express provision of slec.48”. This only shows that the expenditure was not allowable as per the provisions and the Tribunal has tried to rewrite the law. He further submitted that in the detailed discussion by the Pune Bench, ultimately the decision of Mumbai Bench in the case of Devendra Motilal Kothari vs. DCIT [supra] where after detailed discussion portfolio management service fee was held to be not allowable under the head capital gains, was distinguished on the basis of the decision of the Hon’ble Bombay High Court in the case of CIT vs. Shakuntala Kantilal [supra]. However, the decision of Shakuntala Kantilal [supra] came up for consideration later on before the Hon’ble Bombay High Court in the case of CIT vs. Roshanbabu Mohd. Hussein Merchant [275 ITR 231]. He then referred to the judgment and pointed out that while dealing with this decision at para-18 the Hon’ble High Court very clearly held that the said decision is no longer a good law in the light of the subsequent decision of the apex court. He pointed out that in the decision in the case of KRA Holding & Trading Pvt. Ltd. [supra] the Tribunal had decided the issue without noticing the latest decision of the Hon’ble Bombay High Court and, therefore, the decision of KRA Holding & Trading Pvt. Ltd. [supra] is also not a good law and should not be followed and rather the decision of co-ordinate Bench in the case of Devendra Motilal Kothari vs. DCIT [supra] should be followed.

11. He further submitted that portfolio advisory fee has nothing to do with either cost of acquisition or even transfer of shares. The fee is charged on percentage basis and even if shares are not transferred or no fresh purchases are made even then such fee is chargeable. He submitted that the alternate contention of the Ld. Counsel that portfolio charges should have been allowed u/s.37[1] is not maintainable because no such contention was raised before the AO or CIT(A) and in any case assessee has not produced any material before the Tribunal to show that portfolio advisory fee related to the transactions of F&O so as to be allowable under the head income from business or profession. He submitted that as far as the expenditure on share transaction is concerned, AO has already bifurcated the same at 50% relating to F&O transactions because this was claimed under the head share trading expenses whereas portfolio fee has been claimed under the head capital gains.

12. We have considered the rival submissions carefully in the light of the material on record as well as decisions cited by the parties. The Ld. Counsel of the assessee has not rebutted the argument of the Ld. DR that portfolio advisory fee has been claimed under the head capital gains, therefore, the alternate contention cannot be entertained and further to examine the allowability we need to concentrate only on sec.48 and the same cannot be allowed u/s.37 because only expenditure incurred in relation to business and profession can be considered u/s.37. Section 48 which is the computing section for determination of capital gains reads as under:

Sec.48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto:

From the above it is clear that while computing the capital gains only two kinds of expenditure can be deducted from full value of consideration, viz., [i] expenditure incurred wholly and exclusively in connection with such transfer and [ii] the cost of acquisition or any improvement thereto. The thrust of the argument of Ld. Counsel of the assessee is that portfolio advisory fee would constitute an expenditure which has been incurred in connection with the transfor, because obviously it cannot be argued that such expenditure was in the nature of cost of acquisition or improvement of the asset. The Ld. DR has specifically contended that portfolio advisory fee has nothing to do with the tranfer and such fee was payable even if no shares were transferred or any purchase of shares were made. The Ld. Counsel of the assessee did not rebut these arguments. No details have been filed before us to show how this expenditure has direct nexus with the purchase of shares or transfer of the shares. Therefore, this expenditure cannot be called to be an expenditure which has been incurred in connection with such transaction. We find that this aspect was highlighted by the Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari vs. DCIT [supra] while deciding the identical issue against the assessee. The held column of the decision reads as under:

“The deduction on account of fees paid for PMS has been claimed by the assessee as deduction in computing capital gains arising from sale of shares and securities. He however has failed to explain as to how the said fees could be considered as cost of acquisition of the shares and securities or the cost of any improvement thereto. He has also failed to explain as to how the said fees could be treated as expenditure incurred wholly and exclusively in connection with sale of shares and securities. On the other hand, the basis on which the said fees was paid by the assessee shows that it had no direct nexus with the purchase and sale of shares and as rightly contended by the Departmental Representative, the said fees was payable by the assessee going by the basis thereof even without there being any purchase or sale of shares in a particular period. As a matter of fact, when the CIT(A) required the assessee to allocate the fees paid for PMS in relation to purchase and sale of shares as well as in relation to the shares held as investment on the last date of the previous year, the assessee could not furnish such details nor could he give any definite basis on which such allocation was possible. The fees paid by the assessee for PMS was not inextricably linked with the particular instance of purchase and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with such sale or the cost of acquisition/improvement of the shares and securities so as to be eligible for deduction in computing capital gains under s.48.”