2014 (7) TMI 1235 - AT - Income Tax

Disallowance of Portfolio Management Services (PMS) fees paid while computing capital gain - Held that - Portfolio Management Fees is allowable expenditure as held in KRA Holdings & Trading Pvt. Ltd. 2012 (8) TMI 195 - ITAT Pune

Summary

Issues Involved:
1. Disallowance of Portfolio Management Services (PMS) fees claimed as a deduction from capital gains.
2. Non-consideration of prior favorable decisions in similar cases.
3. Lack of confrontation with case law and opportunity to present the case.

Issue-Wise Detailed Analysis:

1. Disallowance of Portfolio Management Services (PMS) Fees:
The primary issue revolves around the disallowance of Rs. 5,77,03,093/- paid by the assessee as Portfolio Management Fees (PMF) to ENAM AMC Pvt. Ltd., claimed as a deduction from capital gains under section 48 of the Income Tax Act. The Assessing Officer (AO) rejected the deduction on the grounds that the expenditure was not incurred wholly and exclusively in connection with the transfer of assets. The AO emphasized that the fees paid to the Portfolio Manager were for a bundle of services and did not directly correlate with the transfer of capital assets. The AO concluded that such fees could not be claimed as a deduction as they were not directly related to the transfer of shares and securities.

2. Non-Consideration of Prior Favorable Decisions:
The assessee argued that the CIT(A) erred in disallowing the PMS fees without considering the decision in favor of the assessee by the Pune Tribunal in the assessee's own case for the preceding assessment years 2005-06 and 2006-07. The Tribunal had previously allowed the deduction of PMS fees as an expenditure incurred wholly and exclusively in connection with the transfer of capital assets. The CIT(A) upheld the AO's decision, citing the Hon'ble Bombay High Court's ruling in CIT vs. Roshanbabu Mohammed Hussein Merchant, which held that PMS fees were neither the cost of acquisition nor the cost of improvement of shares and were not incurred wholly and exclusively in connection with the transfer of assets.

3. Lack of Confrontation with Case Law and Opportunity to Present the Case:
The assessee contended that the CIT(A) did not confront them with the case law referred to in the order and did not provide an adequate opportunity to present their case. This procedural lapse was highlighted as a significant issue, as it denied the assessee the chance to make submissions and rebut the findings effectively.

Tribunal's Findings:
The Tribunal found merit in the assessee's arguments. It referred to the ITAT Pune 'A' Bench's decision in ARA Holding & Trading Pvt. Ltd. and others, which had allowed the deduction of PMS fees in similar circumstances. The Tribunal noted that the Revenue had not appealed against the Tribunal's earlier decision allowing the deduction of PMS fees in the assessee's own case. It emphasized the principle that when two views are possible, the one favorable to the assessee should be followed, as established in CIT vs. Vegetable Products.

The Tribunal also referenced the decision in DCIT vs. KRA Holding & Trading Pvt. Ltd., where a similar issue was decided in favor of the assessee. The Tribunal reiterated that unless the decision of the Tribunal is reversed by a higher court, it should be followed. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction of PMS fees as claimed by the assessee.

Conclusion:
The appeal filed by the assessee was allowed, with the Tribunal directing the AO to allow the deduction of PMS fees as an allowable expenditure. The judgment underscores the importance of consistency in judicial decisions and adherence to procedural fairness in tax assessments.