2016 (5) TMI 155 - AT - Income Tax

Disallowance of an amount being Management Expenses incurred for earning Short term capital gain - Held that - PMS expenses 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. - Decided against assessee.

Issues Involved:
1. Disallowance of management expenses incurred for earning short-term capital gains.
2. Applicability of CBDT Circular No. 21/2015 for the Revenue’s appeal.

Detailed Analysis:

1. Disallowance of Management Expenses Incurred for Earning Short-Term Capital Gains

The primary issue in the assessee's appeal was the disallowance of ?20,04,393/- claimed as management expenses incurred for earning short-term capital gains. The assessee, a director in a private company, disclosed short-term capital gains of ?1,99,003/- and long-term capital gains of ?72,94,563/- as exempt income under Section 10(35) of the Income Tax Act, 1961. The assessee also received dividend income and interest from relief bonds.

During the assessment, the Assessing Officer (AO) noted that the assessee had earned gains of ?92,17,544/- from Portfolio Management Services (PMS) accounts, with ?23,56,127/- from short-term capital gains. The AO disallowed the expenditure of ?22,64,272/- claimed for earning short-term capital gains, as no expenditure is allowable for earning such gains under Section 143(3) of the Act.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the expenses, permitting ?2,59,879/- as deductible PMS expenses related to short-term capital gains, while disallowing the remaining ?20,04,393/-. The CIT(A) based this decision on the ratio of sales to the total of purchase and sale being 45%.

The Tribunal, after considering the rival contentions and perusing the material available, upheld the disallowance. The Tribunal observed that the PMS charges paid to ICICI Prudential Asset Management Company Limited and Optimix ING were not expenditure incurred wholly and exclusively in connection with the transfer of shares nor were they cost of acquisition or improvement of the capital asset. The Tribunal referred to the statutory framework under the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993, which defines the roles and responsibilities of portfolio managers, emphasizing that their services extend beyond mere buying and selling of shares to include advisory and administrative services.

The Tribunal also relied on previous decisions of the jurisdictional Mumbai Tribunal, including Devendra Motilal Kothari v. DCIT, Homi K Bhabha v. ITO, and Pradeep Kumar Harlalka v. ACIT, which held that PMS fees are not deductible under Section 48 of the Act. Consequently, the Tribunal dismissed the assessee's appeal.

2. Applicability of CBDT Circular No. 21/2015 for the Revenue’s Appeal

The Revenue's appeal was disposed of based on the tax effect being less than ?10 lacs, as per the latest CBDT Circular No. 21/2015. The Circular, issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, stipulates that no appeal shall be filed by the Revenue in cases where the tax effect is below the specified monetary limits. For appeals before the Appellate Tribunal, the limit is ?10,00,000/-.

The Departmental Representative (DR) acknowledged that the tax effect in the Revenue's appeal was less than ?10 lacs, making the appeal not maintainable. The Tribunal, therefore, dismissed the Revenue's appeal in accordance with the CBDT Circular, allowing the Revenue the liberty to file an application for recall if it is later found that the tax effect exceeds ?10 lacs or as per the provisions of the Circular.

Conclusion:
The Tribunal dismissed both the assessee's appeal regarding the disallowance of management expenses for short-term capital gains and the Revenue's appeal due to the tax effect being below the threshold specified in the CBDT Circular.

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