Case Law Details
ACIT Vs Apurva Mahesh Shah (ITAT Mumbai)
Portfolio Management Fees and Performance Linked Fees were paid by the assessee to his portfolio manager i.e. M/s Enam Assets Management Company (P) Ltd. towards service charges for making investments of his funds and managing the portfolio of securities, therefore, the same not being an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee, had thus rightly been held by the A.O as not allowable as a deduction under Sec. 48 of the Act. We thus, in terms of our aforesaid observations set aside the order of the CIT(A) and uphold the disallowance of Rs. 1,13,12,737/- made by the A.O in respect of the Portfolio Management Fees and Performance Linked Fees which was claimed by the assessee as a deduction under Sec. 48 while computing the STCG on transfer of shares.
FULL TEXT OF THE ITAT JUDGMENT
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-27, Mumbai, dated. 15.07.2011, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated. 27.11.2009. The revenue has assailed the order of the CIT(A) by raising the following grounds of appeal before us :
“1. The Ld. CIT(A) erred in directing the A.O to allow the deduction Rs. 1,13,12,737/- on account of portfolio management (PMS) fees allocated towards the Short term capital gains on sale of shares.
2. The Ld. CIT(A) erred in ignoring the fact that as per section 48 of the I.T. Act, 1961 only those expenses are allowed which are wholly and exclusively in connection with the transfer. The PMS fees paid by the assessee is not incurred wholly and exclusively for the transfer of the securities but for the management of the entire portfolio and is paid in the capacity of owner of securities and not in the course of transaction of securities.
3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.
The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”
2. Briefly stated, the facts of the case are that the assessee had filed his return of income for A.Y. 2007-08, declaring total income of Rs. 1,65,76,355/-. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Act.
3. The issue involved in the present appeal lies in a narrow compass. The assessee had claimed deduction of Portfolio Management Fees (for short ‘PMF’) and Performance Linked Fees (for short ‘PLF’) amounting to Rs. 1,13,12,737/- as expenses incurred in connection with transfer of shares leading to‘Short term capital gain’ (for short ‘STCG’) in his hands. The assessee justifying his claim for deduction of Performance Linked Fees and Portfolio Management Fees paid to his Portfolio manager i.e. M/s Enam Assets Management Company (P) Ltd., submitted that as the same were allowable under Sec. 48 of the Act, therefore, his claim for deduction of the said expenses on proportionate basis between STCG and LTCG was well in order. However, the A.O after deliberating at length on the contentions advanced by the assessee was however not persuaded to accept the same. The A.O after perusing the terms and conditions in the agreement between the assessee and his portfolio manager viz. M/s Enam Assets Management Company (P) Ltd., held a conviction that PMF and PLF were service charges for making investments of assesses fund and managing the portfolio of securities. On the basis of his aforesaid observations, the A.O was of the view that as PMF and PLF charges could not be construed as an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee, therefore, the same could not be allowed as a deduction while computing the STCG in the hands of the assessee. In the backdrop of his aforesaid deliberations the A.O disallowed the PMF and PLF charges of Rs. 1,13,12,737/- and worked out the STCG at Rs. 2,67,64,581/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) being of the view that the assessee while computing the STCG on transfer of shares had rightly claimed as deduction the fees of Rs. 1,13,12,737/- paid to the portfolio manager, allowed the same as a deduction. The CIT(A) while concluding as hereinabove, observed as under :
“I have carefully considered the contents of the assessment order and appellant‟s submissions thereof. Section 48 of the Act entities the appellant to claim the expenditure which was incurred wholly and exclusively in connection with the transfer of asset resulting in capital gains. The word „in connection with‟ has to be examined in terms of existence of an intimate connection between the expenditure and act of transferring the assets. It could be immaterial when the expenditure was incurred i.e. at the time of or subsequent to a transaction so long as it is wholly and exclusively spent in connection with the acquisition or the transfer. There is no warrant for importing a restriction to qualify the deduction that the expenditure must be incurred prior to passing of the title. The decisions of various High Courts in the cases of viz., Shakuntla Kantilal, (Bombay High Court) 190 ITR 56, Dr. P. Rajendran (Kerala High Court) 127 ITR 810, V.A. Vasumati (Kerala High Court) 123 ITR 94 and Compagnie financier Hamon (AAR) 310 ITR 1 support this proposition. That apart, the issue under consideration is presently covered in favour of the appellant by the decision of the Hon‟ble ITAT, Pune Bench in the cases of M/s KRA Holding and Trading Pvt. Ltd and M.s ARA Trading and investments Pvt. Ltd. in appeal Nos. 1321 of 2002-03, 499 & 500 of 2004-05, 1320 & 1322 of 2005-06 and 434 & 806 of 2006-07. Having regard to the above, I am of the considered opinion that the PMS fees paid to the Port Folio Management is an allowable deduction. Accordingly, the addition made by the AO is deleted and the appellant gets relief.”
5. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Departmental Representative (for short „D.R.‟) at the very outset submitted that the CIT(A) had erred in allowing the PMF and PLF charges of Rs. 1,13,12,737/- as deduction while computing the STCG arising on the transfer of shares. It was submitted by the Ld. D.R. that as PMF and PLF charges were not in the nature of expenditure incurred wholly and exclusively in connection with transfer of shares, thus the A.O had rightly disallowed the said claim of the assessee. The Ld. D.R. in support of his contention that the payment of fees by an assessee for portfolio management services was not eligible for deduction while computing the income under the head capital gain, relied on the following orders of the coordinate benches of the Tribunal :
i) Shri Homi K. Bhabha Vs. The ITO (Intl. Taxation), 3(1), Mumbai.[ITA No. 3287/Mum/2009, dated:28.09.2011]
(ii) Pradeep Kumar Harlalka Vs. ACIT, Circle 12(3), Mumbai [143 TTJ 446 (Mum)]
(iii) Capt. Avinash Chander Batra Vs. Dy. CIT, Range-2(3), Mumbai. [ITA No. 7407/Mum/2011, dated:30.03.2016]
Per contra, the assessee who had put up an appearance in person relied on the order of the CIT(A). It was submitted by the assessee that as the portfolio management fees and portfolio linked fees were incurred wholly and exclusively in connection with the acquisition or the transfer of the shares, therefore, the CIT(A) concurring with his view had rightly allowed the same as a deduction for computing the STCG arising on the transfer of shares. The assessee in support of his aforesaid contention relied on the order of the coordinate bench of the Tribunal in the case of KRA Holding and Trading Pvt. Ltd. Vs. DCIT, Circle-11(1), Pune (ITA No. 240/PN/2011, dated: 25.07.2012).
6. We have heard the assessee and the ld. D.R, perused the orders of the lower authorities and the material available on record. We are of the considered view that there are conflicting views of the coordinate benches of the Tribunal as regards the allowability of PMF and PLF charges as a deduction, while computing the income of the assessee under the head capital gains. We find that a coordinate bench of ITAT, Mumbai in the case of Devendra Motilal Kothari (2011)132 ITD 173 (Mum) had way back concluded that portfolio management expenses could neither be considered as cost of acquisition nor as a cost of improvement or expense incurred in connection with sale of shares. However, subsequently another coordinate bench of the Tribunal in the case of KRA Holding and Trading Pvt. Ltd. Vs. DCIT, Circle 11(1), Pune (ITA No. 240/PN/2011, dated 25.07.2012) had after considering the order of the Tribunal in the case of Devendra Motilal Kothari (supra), taken a contrary view and had concluded that portfolio management fees was allowable as a deduction while computing the capital gain on transfer of shares. The ITAT, Pune Bench while concluding as hereinabove, had taken support of the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Shakuntla Kantilal (1991)190 ITR 56 (Bom), wherein it was held that expenses incurred in connection with transfer of a capital asset was to be allowed as a deduction under Sec. 48 of the Act. Subsequently, the ITAT, Mumbai ‘C’ bench in the case of Pradeep Kumar Harlalka Vs. ACIT, Circle 12(3), Mumbai (2012) 143 TTJ 446 (Mum), observing that the judgment of the Hon‟ble High Court of Bombay in the case of CIT vs. Roshan Babu Mohammed Hussein (2005) 275 ITR 231(Bom) had held its earlier judgment in the case Shakuntla Kantilal (supra) as no longer being the good law, thus followed the earlier view taken by the ITAT, Mumbai in the case of Devendra Motilal Kothari (supra) and held that the portfolio management fees was not to be allowed as a deduction under Sec. 48 of the Act while computing the income under the head capital gain. We further find that a similar view had also been arrived at by the ITAT, Mumbai in the case of Shri Homi K. Bhabha Vs. ITO (Intl. Taxation), 3(1), Mumbai (2011) 30 CCH 0520 (Mum), wherein too it was held that the portfolio management fees was not allowable as a deduction while computing the STCG on transfer of shares. In this regard we further find that ITAT, Pune Bench in the case of DCIT Vs. KRA Holdings and Trading Co. Pvt. Ltd. (2012) 54 SOT 493 (Pune), after considering the view taken by ITAT, Mumbai in the case of Homi Bhabha (supra) had arrived at a contrary view and following its earlier order had concluded that the portfolio management expenses were to be allowed as deduction under Sec. 48 of the Act while computing the STCG on transfer of shares.
7. We have deliberated at length on the issue under consideration in the backdrop of the aforesaid judicial pronouncements. We find that it is an undisputed fact that the assessee while computing the STCG on transfer of shares had claimed deduction under Sec. 48 of Portfolio Management Fees and Performance Linked Fees amounting to Rs. 1,13,12,737/- paid to his portfolio manager i.e. M/s Enam Assets Management (P) Ltd. We find that our indulgence in the present case has been sought for adjudicating the allowability of the PMF and PLF charges as a deduction under Sec. 48, while computing the STCG on transfer of shares held by the portfolio manager. Before proceeding further, we may herein observe that as per Sec. 48 of the Act, an expense is to be allowed as a deduction while computing the income of the assessee under the head ‘Capital Gain’ only if (i) such expenditure is incurred wholly and exclusively in connection with the transfer of the capital asset; or (ii) is attributable to the cost of acquisition of the assets or the cost of any improvement thereto. We are of the considered view that PMF and PLF charges can neither be considered as cost of acquisition of the shares and securities, nor the same could be related to the cost of any improvement thereto. We are further of a strong conviction that the said fees paid by the assessee to the portfolio manager can by no means be treated as an expenditure incurred wholly and exclusively in connection with sale of shares and securities. Rather, the assessee in lieu of the services so rendered had agreed to pay to the portfolio manager a base fee viz. PMF of half percent (0.5%) of the total net asset value (market value of assets inclusive of all securities and cash balances) under management at the beginning of each quarter. Still further, as is discernible from the agreement between the assessee and his portfolio manager, the assessee was also to pay a performance linked return based fee calculated at the rate of 15% per annum of the profits in excess of 15% (benchmark) of the profits after deducting all the expenses including the fees payable to the portfolio manager for every completed year (12 months period from the date of joining) of service or any part thereof. We are thus of the considered view that from a perusal of the terms and conditions of the agreement between the assessee and his portfolio manager, it can safely be gathered that the PMF and PLF charges paid by the assessee to his portfolio manager are clearly in the nature of service charges for making investments of assesses fund and managing the portfolio of securities. We thus, are of the considered view that the aforesaid service charges can neither be construed as an expenditure incurred wholly and exclusively in connection with the transfer of the share and securities, nor the same can be attributed to the cost of acquisition or the cost of improvement thereto. We are thus of the view that the expenses incurred by the assessee toward PMF and PLF charges can by no means be brought within the sweep of the deductions contemplated under Sec. 48 of the Act. We have further perused the conflicting views taken by the coordinate benches of the Tribunal and are persuaded to be in agreement with the view taken by the ITAT “A” Bench, Mumbai in the case of Capt. Avinash Chander Batra Vs. Dy. CIT, Range-2(3), Mumbai (ITA No. 7407/Mum/2011), dated 30.03.2016 relied upon by the Ld. D.R. in support of his claim that the portfolio management expenses cannot be allowed as a deduction under Sec. 48 of the Act. We find that the Tribunal in its aforesaid order had after deliberating at length on the issue under consideration in the backdrop of the conflicting views arrived at by the Tribunal, functioning of the portfolio managers in India [as regulated by Securities and Exchange Board of India Act, 1992 (15 of 1992)] and Securities and Exchange Board of India (portfolio managers) Regulation, 1993 (as amended from time to time), concluded that the portfolio management expenses being incurred by way of management expenses w.r.t. securities/funds of the assessee being managed by portfolio managers, would not be allowable as deduction under Sec. 48 of the Act while computing the STCG on the sale of shares and securities, by observing as under :
“9. We have considered the rival contentions and also perused the material available on record including case laws relied upon by the rival parties. We have observed that the assessee has paid portfolio management services expenses of Rs.22,64,272/- to portfolio managers namely ICICI Prudential Asset Management Company Limited and Optimix ING for managing portfolio management services (PMS) account‟s of the assessee. These charges of Rs.22,64,272 being portfolio management fees are stated by the assessee to be paid on purchases and sales of shares and the same has been disallowed by the authorities below except to the tune of Rs.2,59,879/- which was allowed by the CIT(A) towards PMS charges on sale of shares on which short term capital gains has been earned and the Revenue has challenged the same before the Tribunal, while the assessee is in appeal for the disallowance by the CIT(A) of the rest of the PMS expenses of Rs.20,04,393/- vide this appeal. It is an undisputed and admitted position between the rival parties that the assessee has earned capital gains on sale of shares held under Portfolio Management Services account of the assessee with ICICI Prudential Asset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of Rs.22,64,272/- has been paid by the assessee to the portfolio managers , the income arising thereof from sale of shares is chargeable to tax under the head Capital Gains , for which the income is to be assessed under Chapter IV-E of the Act as per the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under:
“Section 48
[Mode of computation.
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:…..”
Thus, as could be observed from provisions of Section 48 of the Act , for computing capital gains, it is required to deduct from full value of consideration, the expenditure incurred wholly and exclusively in connection with such transfer and also the cost of acquisition of the capital asset and cost of any improvement thereto.
With the above background, we have to see whether the portfolio management charges of Rs. 22,64,272/- paid by the assessee can be allowed as deduction from the full value of consideration received or accruing to the assesse as a result of transfer of the capital asset being shares , provided the said PMS charges are either expenditure incurred wholly and exclusively in connection with the transfer of shares or PMS charges is a cost of acquisition or the cost of any improvement thereto of the capital asset being shares as per mandate of Section 48 of the Act. The assessee to support his contentions has relied on the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Rules, 2002 to contend that these PMS charges are allowable expenditure as the portfolio managers are allowed to be paid fee on ‘return based fee’ meaning thereby that it is an expenditure incurred wholly and exclusively in connection with the transfer of shares as these PMS charges are connected with sale and purchase of shares. Before we proceed further to decide whether PMS charges paid by the assessee is allowable as deduction as per provisions of Section 48 of the Act, we must analyze the statutory and legal framework within which portfolio managers carry on their activities in India and their roles and responsibilities in discharging their duties.
The business activities of portfolio managers in India are regulated by Securities and Exchange Board of India Act,1992(15 of 1992) (in short “SEBI Act,1992”) . The SEBI Act,1992 provides for an establishment of the Board (Hereinafter called ‘the SEBI’) to protect the interests of investors in securities and to promote the development of, and regulate , the securities market and for matters connected therewith or incidental thereto. It is provided in Chapter IV of the SEBI Act,1992 which deals with power and functions of the Board u/s.11(1) of SEBI Act,1992 that it shall be duty of the SEBI to protect the interests of investors in securities and to promote the development of, and regulate , the securities market , by such measures as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve the objects of SEBI Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from the SEBI in accordance with the regulations made under the SEBI Act,1992. The SEBI Act,1992 by virtue of provisions of Section 30 grants the power to SEBI to make regulations by notification consistent with the SEBI Act,1992 and the rules made there-under to carry out purposes of the Act which is primarily investor protection and to promote the development of, and to regulate the securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate the business of portfolio managers in India by promulgating ‘Securities and Exchange Board of India (Portfolio Managers) Regulation,1993’ which were amended from time to time. Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , the portfolio manager is defined as under:
“(cb) “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;]
Under Clause 14 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993, it is stipulated as to contract which portfolio manager is required to enter with client and disclosures to be made as under:-
“[14. Contract with clients and disclosures.─(1) (a) The portfolio manager shall, before taking up an assignment of management of funds or portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV.
(b) The agreement between the portfolio manager and the client shall, inter alia, contain:
(i) the investment objectives and the services to be provided;
(ii) areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or industry;
(iii) type of instruments and proportion of exposure;
(iv) tenure of portfolio investments;
(v) terms for early withdrawal of funds or securities by the clients;
(vi) attendant risks involved in the management of the portfolio;
(vii) period of the contract and provision of early termination, if any;
(viii) amount to be invested subject to the restrictions provided under these regulations;
(ix) procedure of settling client’s account including form of repayment on maturity or early termination of contract;
(x) fees payable to the portfolio manager;
(xi) the quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced);
(xii) custody of securities;
(xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager;
(xiv) the terms of accounts and audit and furnishing of the reports to the clients as per the provisions of these regulations;
(xv) other terms of portfolio investment subject to these regulations.”
The portfolio managers general responsibilities are defined in clause 15 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :-
“15. General responsibilities of a Portfolio Manager.─(1) The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client.
[(1A) The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees.] (2) The portfolio manager shall act in a fiduciary capacity with regard to the client’s funds.
[(2A) The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank.
Explanation.─ For the purposes of this sub-regulation, the expression ‘Scheduled Commercial Bank‘ means any bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).] (3) The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934).
(4) The portfolio manager shall not derive any direct or indirect benefit out of the client’s funds or securities.
[(4A) The portfolio manager shall not borrow funds or securities on behalf of the client.]
[(5) The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.]
(6) The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately”.
These Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 were amended from time to time and the relevant amendments so far concerning issue‟s under this appeal are reproduced below :
“These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2006.
…………………………………………………………………………………………
3. In the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993:
(i) in regulation 2, clause (d) shall be substituted with the following, namely:
“(d) ‘principal officer’ means an employee of the portfolio manager who has been designated as such by the portfolio manager;”
(ii) in regulation 6, in sub-regulation (2), clause (c) shall be substituted with the following, namely:
“(c) the principal officer of the applicant has either-
(i) a professional qualification in finance, law, accountancy or business management from a university or an institution recognised by the Central Government or any State Government or a foreign university; or
(ii) an experience of at least ten years in related activities in the securities market including in a portfolio manager, stock broker or as a fund manager.”
These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Second Amendment) Regulations, 2006. “c) after clause (c) the following clauses shall be inserted, namely:
“(ca) “portfolio” means the total holdings of securities belonging to any person;
(cb) “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;”
The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with an objective of investor protection and promote and regulate securities market. The qualification and experience of the portfolio manager is also specified in the afore-stated regulations so that only professional, skilled, specialized and experienced persons are engaged in the activities of portfolio management . The roles and responsibilities of portfolio managers covers a vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client the management or administration of a portfolio of securities or funds of the client meaning thereby that the portfolio managers does not act merely as a stock-broker to buy and sell shares of the clients in execution of the instructions of the client‟s for a brokerage/commission , but portfolio manager renders a vast spectrum of activities which involves giving advises to clients and/or management and administration of securities or fund portfolio’s of the client which is managed by experienced, specialized, skilled and qualified professionals who act as portfolio managers to render their expertise, skill and specialized knowledge to the investor‟s client for a fee with an objective to create wealth for the investor client‟s and maximizing gains for these investors client. The highly specialized and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in a highly volatile and complex securities market with an objective of wealth creation and maximizing gains for the investor‟s clients and are not rendering merely services connected with the transfer of shares nor are they connected with cost of acquisition or sale of shares even if these PMS charges are paid based and calculated on purchases and sales of shares or even if these PMS charges are return based fees. These fees have a major component towards advisory charges being highly skilled and specialized knowledge and expertise based services being managerial and consultancy services of experienced and qualified professionals acting as portfolio managers who render these specialized and skilled services on a continuous basis to investor client for fee in a highly volatile and complex securities market to maximize gains and to create wealth for the investors, whether these fee paid to portfolio managers are calculated based on purchases or sales of securities, or a return based fee etc. is not relevant and material but the fact of the matter is that these PMS charges are not paid towards cost of acquisition of the capital assets or for improvement of the capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of the capital asset and hence the same cannot be allowed as deduction u/s. 48 of the Act from the full value of consideration received or accruing to the assessee as a result of the transfer of the capital asset being shares.
Our above view is fortified by the decision of jurisdictional Mumbai-tribunal in the case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). The findings of the Mumbai-tribunal in the case of Devendra Motilal Kothari(supra) on identical issue are as under:
“12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities chargeable to tax under the head “capital gains” and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that the charge of Income-tax is created by virtue of the provisions contained in section 4 according to which the Income-tax is charged for the relevant assessment year in accordance with and subject to the provisions of Income-tax Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head ‘capital gains’ and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the assessee as a result of transfer of the capital assets.
13. In the present case, 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 show that it had no direct nexus with the purchase and sale of shares and as rightly contended by the Ld. DR, 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 ld. 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. Having regard to all these facts of the case, we are of the view that 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 section 48.
14. As regards the case laws cited by the Ld. Counsel for the assessee in support of the assessee’s case on the point under consideration, it is observed that the facts involved therein were altogether different in as much as the relevant amounts claimed by the assessee as deduction in computing capital gains were found to be in the nature of expenditure/cost covered by section 48. For instance, in the case of Mathuradas Mangaldas Parekh (supra), payment of betterment charges made under town planning scheme had resulted in increase in potential value of land and the same therefore were held to be cost of improvement of the said land. Similarly, in the case of Chemmancherry Estates Co. ( supra), funds borrowed by the assessee were utilized for acquisition of land and the interest paid thereon thus was held to the forming part of the cost of acquisition of the land. In other cases also, the brokerage expenses incurred by the assessee were in respect of particular sale of capital assets and the same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale.
15. At the time of hearing before us, the Ld, Counsel for the assessee has raised an alternative contention in support of the assessee’s claim for deduction on account of fees paid for PMS in computing the capital gains relying on the theory of real income and the rule of diversion of income by an overriding title. He has contended that the fees for PMS being contractual liability directly relatable to the capital gains, there was a diversion of income from capital gain by an overriding title to the extent of the amount of such fees and the same therefore was not the income belonging to the assessee which was chargeable to tax under the head ‘capital gains’. In this regard, we may observe that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged by an overriding title, the same can be considered as diversion of income by an overriding title.
16. In the case of Sitaldas Tirathdas (supra), it was held by the Hon’ble Supreme Court that the true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, are there in every case, but it is the nature of the obligation which is the decisive fact. Explaining, further, it was observed by the Hon’ble Supreme Court that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches to the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was held by the Hon’ble Supreme Court that it is the first kind of payment which can truly be excluded and not the second. The second payment is merely an obligation to pay another a portion of one’s own income which has been received and is since applied.
17. In the present case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any merit.
18. As regards the contention of the Ld. Counsel for the assessee in support of assessee’s claim for deduction on account of fees paid for PMS based on real income theory, we agree with the ld. DR that the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the Income-tax Act. In the case of CIT v. Udayan Chinubhai [1996] 222 ITR 456 / 88 Taxman 114 (SC) it was held by the Hon’ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory.
19. For the reasons given above, we find no merit in the arguments raised by the Ld. Counsel for the assessee in support of the assessee’s case on the issue under consideration and rejecting the same, we hold that the fees paid by the assessee for PMS was not deductible in computing the capital gains as rightly held by the Assessing Officer The impugned order of the Ld. CIT(A) confirming the disallowance made by the Assessing Officer on this issue is therefore upheld dismissing this appeal filed by the Assessee.
20. In the result, the assessee’s appeal is dismissed”
The assesseee has placed reliance on decision‟s of Pune benches of the Tribunal including in the case of KRA Holding and Trading Private Limited (supra) which is distinguished by the Mumbai Tribunal in the case of Pradeep Kumar Harlalka(supra) as under:-
“13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding & Trading (P.) Ltd. (supra), after perusing the judgment very carefully we find that in that decision the decision of co-ordinate Bench of Mumbai Tribunal in the case of Devendra Motilal Kothari (supra) was distinguished mainly on the basis of decision of Hon’ble Bombay High Court in the case of Smt. Shakuntala Kantilal (supra). The Pune Bench referred to various paras of Hon’ble Bombay High Court’s decision in para22 and ultimately concluded in para-23 that what was required was that the claim should be bona fide and claim for such genuine expenditure has to be allowed so long as incurring of the expenditure is a matter of fact and necessity. However, as pointed out by the Ld. DR this decision was specifically over ruled by the Hon’ble Bombay High Court in the case of Roshanbabu Mohd. Hussein Merchant (supra) and at placitum 18 it has been observed as under:
“As regards the decisions of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312] and the decision of the Kerala High Court in the case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802 which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the apex court referred to hereinabove.”
Thus, without going into further details we would only like to observe that the decision in the case of Smt. Shakuntala Kantilal (supra) is no more a good law in view of the latest decision and therefore that decision cannot be relied for the proposition that necessity of expenditure would make the same allowable.”
Thus, Respectfully following the afore-stated decision‟s of the co-ordinate jurisdictional Benches of the Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of Rs.20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of the assessee being managed by portfolio managers , being disallowed by the AO and confirmed by the CIT(A), are not allowable as deduction u/s 48 of the Act from the full value of consideration on sale of securities received or accruing to the assessee. Accordingly, we dismiss this appeal filed by the assessee. We order accordingly.”
8. We have deliberated at length on the aforesaid order of the Tribunal and find ourselves to be in agreement with the view therein taken. We are of the considered view that as the Portfolio Management Fees and Performance Linked Fees were paid by the assessee to his portfolio manager i.e. M/s Enam Assets Management Company (P) Ltd. towards service charges for making investments of his funds and managing the portfolio of securities, therefore, the same not being an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee, had thus rightly been held by the A.O as not allowable as a deduction under Sec. 48 of the Act. We thus, in terms of our aforesaid observations set aside the order of the CIT(A) and uphold the disallowance of Rs. 1,13,12,737/- made by the A.O in respect of the Portfolio Management Fees and Performance Linked Fees which was claimed by the assessee as a deduction under Sec. 48 while computing the STCG on transfer of shares.
9. The appeal of the revenue is allowed.
Order pronounced in the open court on 29.06.2018
