2020 (2) TMI 708 - AT - Income Tax

Computation short term capital gain (STCG) - allocation of Portfolio Management Services (PMS Charges) towards Dividend and interest income - revenue authorities allocating Portfolio Management Services (PMS) Charges while computing income under the head short term capital gain (STCG) which suffers tax @ 15% as against the claim of assessee that the deduction on account of PMS Charges while computing income under the head STCG should be only ₹ 6,63,040 - HELD THAT - Difference in apportionment between the Assessee and the revenue is because of inclusion of STCG earned by the Assessee on his own without the services of the PMS provider has also been included by the revenue in the income generated through the services of PMS providers. The Chart annexed to this order as Annexure-II will show that the STCG earned by the Assessee of ₹ 10,17,38,369 comprises of STCG earned by the Assessee on her own without the services of PMS provider as well as through services provided by the PMS provider. STCG earned by the Assessee through the services of the Two PMS providers is reflected in the Chart given as Annexure-II to this order . Therefore, the apportionment of PMS charges paid by the Assessee of ₹ 41,67,502/- has to be apportioned only on the basis of income earned through the respective PMS providers to the total PMS charges. This basis of apportionment as given in the chart given as Annexure-I to this order, in our view appears to be correct. This Chart was however not filed before the revenue authorities but Chart given as Annexure-II to this order was filed before the CIT(A) and there is no difference in the chart given as Annexure- I and II in principle except the manner of presentation. In our view, the CIT(A) was not justified in holding that the Assessee has not brought any documentary evidence to substantiate the basis of allocation of PMS fee to selective PMS providers. The documents in the form of statement of the PMS providers viz., HDFC Asset Management Company Ltd. and that of Morgan Stanley AMC (Empower fund) clearly show the income earned from the two PMS providers. CIT(A) accepts that allocation of expenses should have been done on the total income through earned through PMS under the head STCG and interest income. He has however overlooked that this is the basis of allocation by the Assessee. On the facts and circumstances of the present case, we are satisfied that the basis of allocation of PMS charges as done by the Assessee is correct and deserves to be accepted. We therefore direct that the allocation of PMS charges as done by the Assessee be accepted. - Decided in favour of assessee

Issues Involved:
Allocation of Portfolio Management Services (PMS) Charges while computing income under the head Short Term Capital Gain (STCG).

Issue-wise Detailed Analysis:

1. Allocation of PMS Charges:
The primary issue in this appeal is whether the revenue authorities were justified in allocating PMS Charges while computing income under the head STCG, which is taxed at 15%, at ?37,71,050 instead of the assessee's claim of ?6,63,040.

2. Assessee's Income and PMS Charges:
The assessee, an individual, filed a return of income for AY 2011-12 declaring a total income of ?24,60,50,090, which included income from house property, STCG, and income from other sources. The assessee paid PMS Charges of ?72,94,053 to HDFC Real Estate PMS and Morgan Stanley PMS. The assessee claimed a deduction of PMS Charges against STCG and interest income, with no deduction claimed for dividend income, which is tax-exempt.

3. AO's Allocation of PMS Charges:
The AO did not accept the assessee's bifurcation of PMS Charges and instead allocated ?41,67,502 based on the income under the head "Capital Gain" and interest income. This resulted in PMS charges being apportioned at ?6,63,040 against STCG and ?37,71,050 against interest income. The AO's observations highlighted that the assessee's AR was unable to bifurcate exact interest referable to STCG and interest received, leading to a proportionate allocation of PMS Charges.

4. CIT(A)'s Confirmation:
The CIT(A) confirmed the AO's action, stating that the appellant did not provide documentary evidence to substantiate the basis of allocation of PMS fee to selective PMS providers. The CIT(A) emphasized that allocation should be done on the total income earned through PMS under the head STCG and interest income, and the appellant's method was not maintainable.

5. Tribunal's Analysis and Decision:
The Tribunal found that the assessee had apportioned PMS Charges based on the income earned from dividend, interest on debentures, and STCG. The Tribunal noted that the revenue authorities' allocation included STCG earned by the assessee on their own without PMS providers' services. The Tribunal concluded that the correct basis of apportionment should be on the income earned through the respective PMS providers. The Tribunal accepted the assessee's allocation method as correct, based on the documentary evidence provided.

Conclusion:
The appeal by the assessee was allowed, and the Tribunal directed that the allocation of PMS Charges as done by the assessee be accepted. The Tribunal found that the CIT(A) was not justified in holding that the assessee did not provide documentary evidence to substantiate the allocation basis. The Tribunal was satisfied with the assessee's basis of allocation of PMS Charges and allowed the appeal.

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