2011 (9) TMI 104 - AT - Income Tax

Expenses incurred (professional Fee or Management fee) to earn short term capital gains. - Diversion of income by overriding title - Relation of expenses with sales consideration- Held that - on the basis of Devendra Motilal Kothari s case (2010 -TMI - 206465 - ITAT MUMBAI), 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. Decided against Assessee.

Issues Involved:
1. Deduction for expenses incurred in connection with earning short-term capital gains.
2. Whether fees incurred were a diversion of income by overriding title.
3. Computation of full value of consideration after deducting fees.
4. Addition of fees to the cost of acquisition/improvement of assets.

Issue-wise Detailed Analysis:

1. Deduction for expenses incurred in connection with earning short-term capital gains:
The assessee challenged the disallowance of professional and profit-sharing fees paid to ENAM Asset Management Co. Ltd. for portfolio management services against short-term capital gains. The Assessing Officer (A.O.) disallowed the deduction, stating that the fees were unrelated to the transactions resulting in capital gain. The CIT(A) upheld this view, denying the deduction under Section 48 of the Income Tax Act. The Tribunal referred to previous cases, including Devendra Motilal Kothari v. Dy. CIT, where the fees were not considered eligible for deduction in computing capital gains. The Tribunal upheld the CIT(A)'s decision, maintaining that the fees could not be deducted as they were not directly related to the capital gains transactions.

2. Whether fees incurred were a diversion of income by overriding title:
The assessee argued that the fees paid to the portfolio manager should be considered a diversion of income by overriding title. This argument was based on the nature of the fees being directly related to the sale of shares. However, the Tribunal, referencing the case of Devendra Motilal Kothari, held that the fees did not constitute a diversion of income by overriding title. The Tribunal noted that the Mumbai Bench had previously determined that such fees were neither a cost of acquisition nor a cost of improvement and thus not deductible in computing capital gains.

3. Computation of full value of consideration after deducting fees:
The assessee contended that the full value of consideration received should be computed after deducting the fees paid. The Tribunal examined the agreements and clauses regarding the consideration payable to the portfolio manager. It was argued that the fees were directly related to the income from the transfer of shares. Despite these arguments, the Tribunal upheld the view that the fees could not be deducted from the full value of consideration received, aligning with the earlier decisions that such fees were not part of the computation of capital gains under Section 48.

4. Addition of fees to the cost of acquisition/improvement of assets:
The assessee also argued that the fees should be added to the cost of acquisition or improvement of the assets. The Tribunal referred to the judgments in Devendra Motilal Kothari and KRA Holding & Trading (P.) Ltd., noting that the fees paid for portfolio management services were not considered as part of the cost of acquisition or improvement. The Tribunal emphasized the need for judicial discipline and consistency, stating that the earlier decisions should be respected unless there were compelling reasons to deviate. The Tribunal found no such reasons in this case and upheld the disallowance of the fees as part of the cost of acquisition or improvement.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT(A)'s order and maintaining that the fees paid for portfolio management services could not be deducted in computing capital gains, were not a diversion of income by overriding title, could not be deducted from the full value of consideration received, and could not be added to the cost of acquisition or improvement of assets. The decision was based on the principles of judicial precedent and consistency with previous Tribunal rulings.

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