2011 (8) TMI 479 - AT - Income Tax

Loss arising out of transaction in Futures and Options - As the 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. v. Asstt. CIT 2009 (7) TMI 172 - ITAT CALCUTTA holding that insertion of clause (d) in section 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 ₹ 3,27,687 under the head business. Portfolio advisory fee -CIT(A) observed that as per section 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 - the decision of the Mumbai Bench in the case of Devendra Motilal Kothari v. Dy. CIT 2011 (9) TMI 104 - ITAT MUMBAI wherein it was held that portfolio management fee is not allowable expenditure u/s.48 - Decided against the assessee. Deduction under section 80C - the claim was made by way of a letter without revising the return - Revenue submitted that AO has no right to allow any claim in the absence of revised return - the decision of Hon ble Supreme Court in the case of Goetze (India) Ltd. v. CIT 2006 (3) TMI 75 - SUPREME Court . held that this restriction is not applicable if the issue is raised before the appellate authority - Therefore, the power of the appellate authority to entertain such claim is still there - Therefore, in the interests of justice we set aside the order of the ld. CIT(A) and remit the matter to the file of the AO with a direction to consider this claim.

Issues Involved:
1. Classification of loss from Futures and Options (F&O) transactions before 25-1-2006 as speculative transactions.
2. Disallowance of portfolio advisory fee and share transaction charges.
3. Denial of deduction under section 80C for investment in tax-saving mutual funds.

Detailed Analysis:

Issue No. 1: Classification of Loss from F&O Transactions

During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had offered Rs. 3,27,687 from F&O transactions under 'short term capital gains'. The AO observed that as per section 43(5)(d), profit from F&O transactions should be assessed under 'business income' and not 'capital gains'. The AO further observed a loss of Rs. 1,35,889 related to transactions before 25-1-2006 and a total gain of Rs. 4,63,577 after that date. Consequently, the AO assessed Rs. 4,63,577 as business income and allowed the loss of Rs. 1,35,889 to be carried forward as speculation loss. The CIT(A) confirmed this action.

Upon appeal, it was argued by the assessee that this issue is settled in favor of the assessee based on the decision in the case of Shree Capital Services Ltd. v. Asstt. CIT, which held that the insertion of clause (d) in section 43(5) is applicable from A.Y 2006-07, and losses incurred before 25-1-2006 should also be considered as business loss. The Tribunal set aside the CIT(A)'s order and directed the AO to assess the net profit from F&O transactions of Rs. 3,27,687 under 'business income'.

Issue No. 2: Disallowance of Portfolio Advisory Fee and Share Transaction Charges

The assessee claimed Rs. 2,35,170 as transaction charges under share trading expenses, which the AO disallowed 50% of, attributing them to F&O transactions. Additionally, the AO disallowed the portfolio management fee of Rs. 6,01,224 claimed under short term capital gains, stating it was not allowable under section 48.

The CIT(A) upheld the AO's decision, stating that under section 48, deductions are allowed only for expenditures incurred wholly or exclusively in connection with the transfer or for the cost of acquisition or improvement of the asset. The portfolio management fee, being a revenue outgoing, did not qualify.

The assessee's counsel argued that share transaction charges should be allowed as they are broker charges and cited the Pune Bench decision in KRA Holding & Trading (P.) Ltd. v. Dy. CIT, which allowed portfolio management fees. However, the Tribunal noted that the decision in KRA Holding was not good law due to subsequent rulings, including CIT v. Roshanbabu Mohd. Hussein Merchant, which overruled the earlier supportive decisions.

The Tribunal concluded that portfolio advisory fees are not allowable under section 48 as they do not relate directly to the transfer of assets. The Tribunal also rejected the alternate claim under section 37(1) as the expenditure was claimed under 'capital gains' and not 'business income'. However, the Tribunal remitted the issue of share transaction charges back to the AO to determine the exact nature of the charges.

Issue No. 3: Denial of Deduction under Section 80C

The assessee invested Rs. 30,000 in a tax-saving mutual fund but did not claim the deduction under section 80C in the original return. The claim was made via a letter without revising the return. The AO did not address this claim, and the CIT(A) rejected it based on the Supreme Court decision in Goetze (India) Ltd. v. CIT, which mandates a revised return for such claims.

The Tribunal acknowledged that while the AO cannot allow claims without a revised return, appellate authorities have the power to entertain such claims. In the interest of justice, the Tribunal set aside the CIT(A)'s order and remitted the matter to the AO to consider the section 80C claim.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to reassess the F&O transactions under 'business income', re-examine the nature of share transaction charges, and consider the section 80C deduction claim. The disallowance of the portfolio advisory fee was upheld.

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