2018 (7) TMI 931 - AT - Income Tax

Deduction on account of portfolio management (PMS) fees allocated towards the Short term capital gains on sale of shares - Held that - Portfolio Management Fees and Performance Linked Fees were paid by the assessee to his portfolio manager i.e. M/s Enam Assets Management Company (P) Ltd. towards service charges for making investments of his funds and managing the portfolio of securities therefore the same not being an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee had thus rightly been held by the A.O as not allowable as a deduction under Sec. 48 - Uphold the disallowance of made by the A.O in respect of the Portfolio Management Fees and Performance Linked Fees which was claimed by the assessee as a deduction under Sec. 48 while computing the STCG on transfer of shares. - Decided in favour of revenue

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether Portfolio Management Fees (PMF) and Performance Linked Fees (PLF) paid by the assessee can be allowed as a deduction under Section 48 of the Income Tax Act, 1961, while computing Short Term Capital Gains (STCG) on the transfer of shares.
• Whether the PMF and PLF charges can be considered as expenses incurred wholly and exclusively in connection with the transfer of shares or as part of the cost of acquisition or improvement of the shares.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

Section 48 of the Income Tax Act, 1961, provides for the computation of capital gains by allowing deductions for expenses incurred wholly and exclusively in connection with the transfer of the asset, as well as the cost of acquisition and improvement of the asset. The legal precedents considered include decisions from various High Courts and earlier Tribunal decisions, notably the ITAT, Pune Bench's decision in the case of KRA Holding and Trading Pvt. Ltd., and the ITAT, Mumbai's decision in the case of Devendra Motilal Kothari.

Court's interpretation and reasoning:

The Tribunal examined whether the PMF and PLF charges paid by the assessee were directly linked to the transfer of shares or constituted the cost of acquisition or improvement. The Tribunal observed that these fees were service charges for managing the portfolio and not directly incurred in connection with the transfer of shares. The Tribunal noted conflicting decisions from different benches regarding the allowability of such fees under Section 48.

Key evidence and findings:

The Tribunal analyzed the agreement between the assessee and the portfolio manager, which outlined the nature of the fees as service charges for managing investments and not as expenses incurred exclusively for the transfer of shares. The Tribunal also considered the regulatory framework governing portfolio managers, emphasizing that their services extend beyond mere execution of trades.

Application of law to facts:

The Tribunal applied Section 48 of the Income Tax Act, determining that PMF and PLF charges do not qualify as expenses incurred wholly and exclusively in connection with the transfer of shares. The Tribunal concluded that these fees are not attributable to the cost of acquisition or improvement of the shares.

Treatment of competing arguments:

The Tribunal considered arguments from both the revenue and the assessee, weighing the conflicting decisions from different benches. The Tribunal ultimately sided with the view that PMF and PLF charges are not deductible under Section 48, aligning with the decisions of the Mumbai Tribunal in similar cases.

Conclusions:

The Tribunal concluded that PMF and PLF charges are not allowable as deductions under Section 48 while computing STCG on the transfer of shares. The Tribunal upheld the disallowance made by the Assessing Officer and set aside the order of the CIT(A).

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"We are of the considered view that PMF and PLF charges can neither be considered as cost of acquisition of the shares and securities, nor the same could be related to the cost of any improvement thereto."

Core principles established:

• PMF and PLF charges are service charges for managing investments and do not qualify as expenses incurred wholly and exclusively in connection with the transfer of shares.
• Such fees cannot be considered as part of the cost of acquisition or improvement of the shares for the purpose of computing capital gains under Section 48.

Final determinations on each issue:

• The Tribunal upheld the disallowance of PMF and PLF charges as deductions under Section 48, reversing the CIT(A)'s decision and restoring the Assessing Officer's original assessment.