2016 (1) TMI 1121 - AT - Income Tax

Disallowance u/s 14A - Held that - We find that the AO made the disallowance u/s 14A r.w.r. 8D(2)(iii) @1/2% of the average investments taking into account all the investments at the beginning and at close of the year which was also upheld by the CIT(A). In the case of ACB India Ltd Vs ACIT (2015 (4) TMI 224 - DELHI HIGH COURT ) the hon ble Delhi High Court has held that the disallowance u/s rule 8D(2)(iii) can not be made on the basis of entire investments but should be worked out by taking only those investments which yielded dividend during the year. The case of the assessee is squarely covered by the above decision and we respectfully following the same delete the disallowance to the extent of ₹ 2,47,413/- out of ₹ 3,19,081/- which is calculated by taking into account those investments which yielded tax free dividend and only disallowance to the extent of ₹ 71,668/- is sustained. The AO is directed accordingly. - Decided partly in favour of assessee. Allowance being PMS fee paid to Enam Securities Direct Pvt Ltd for sale and purchase of shares as part of short term capital loss and allow carry forward of the same - whether the expenses incurred in connection with PMS fee to portfolio manager is an expense which is incurred in connection with the share transfer or relates to dividend income which is exempt? - Held that - The provisions of section 48(i) of the Act provides that the expenditure incurred wholly and exclusively in connection with such transfer shall be deducted from the full value of the consideration for calculating capital gain/loss. Conversely same analogy applies to the purchase also i.e at the time of purchase also the expenses which are wholly and exclusively incurred for the said transaction is also part of the purchase cost. We are, therefore, of the opinion that the ₹ 1,54,904/- is part of short term capital loss and the assessee should be allowed to carry forward the same. The case of assessee also find support from the decision referred to above namely KRA holdings & Tradings (P) Ltd Vs DCIT (2011 (5) TMI 498 - ITAT PUNE ) in which the same issue came up for adjudication of the tribunal and the tribunal also held that the PMS fee is deductible while computing the capital gain. We, therefore, respectfully following the above decision and in view of the provisions of the Act, allow the appeal of the assessee.

Summary

Issues:
1. Disallowance of expenses under section 14A r.w.r. 8D of the Act
2. Treatment of Portfolio Management Services (PMS) fee as part of short term capital loss and carry forward

Issue 1: Disallowance of expenses under section 14A r.w.r. 8D of the Act

The appeal challenged the confirmation of additions of &8377; 3,19,081/- by the CIT(A) regarding disallowance under section 14A r.w.r. 80D of the Act. The AO made the disallowance based on average investments at the beginning and end of the year. The CIT(A) upheld this decision, emphasizing the prevention of expenses related to exempt income. However, the tribunal referred to the ACB India Ltd case, where it was held that disallowance should only consider investments yielding dividend income. Consequently, the tribunal deleted &8377; 2,47,413/- of the disallowance, sustaining only &8377; 71,668/-.

Issue 2: Treatment of Portfolio Management Services (PMS) fee as part of short term capital loss and carry forward

The second ground of appeal concerned the disallowance of &8377; 1,54,806/- PMS fee paid to Enam Securities Direct Pvt Ltd as part of short term capital loss. The AO and CIT(A) denied carry forward, asserting that the fee related to exempt income. The tribunal noted that the fee was for managing the portfolio of share transactions, not directly linked to exempt income. Referring to section 48(i) of the Act, the tribunal held that the fee was incurred wholly and exclusively in connection with share transfers. Relying on the KRA Holdings & Tradings case, the tribunal allowed the carry forward of &8377; 1,54,806/- as part of short term capital loss. Consequently, the appeal was partly allowed.

This detailed analysis of the legal judgment provides a comprehensive understanding of the issues involved and the tribunal's decisions on each matter.