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

Issues Involved
1. Deduction of Portfolio Management Fees (PMF) and Performance Linked Fees (PLF) under Section 48 of the Income Tax Act, 1961.

Detailed Analysis

Issue 1: Deduction of Portfolio Management Fees (PMF) and Performance Linked Fees (PLF) under Section 48 of the Income Tax Act, 1961

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-27, Mumbai, dated 15.07.2011, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961, dated 27.11.2009. The revenue has assailed the order of the CIT(A) by raising the following grounds of appeal before us:

“1. The Ld. CIT(A) erred in directing the A.O to allow the deduction ? 1,13,12,737/- on account of portfolio management (PMS) fees allocated towards the Short term capital gains on sale of shares.

2. The Ld. CIT(A) erred in ignoring the fact that as per section 48 of the I.T. Act, 1961 only those expenses are allowed which are wholly and exclusively in connection with the transfer. The PMS fees paid by the assessee is not incurred wholly and exclusively for the transfer of the securities but for the management of the entire portfolio and is paid in the capacity of owner of securities and not in the course of transaction of securities.

3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”

The issue involved in the present appeal lies in a narrow compass. The assessee had claimed deduction of Portfolio Management Fees (PMF) and Performance Linked Fees (PLF) amounting to ? 1,13,12,737/- as expenses incurred in connection with transfer of shares leading to ‘Short term capital gain’ (STCG) in his hands. The assessee justifying his claim for deduction of Performance Linked Fees and Portfolio Management Fees paid to his Portfolio manager i.e. M/s Enam Assets Management Company (P) Ltd., submitted that as the same were allowable under Sec. 48 of the Act, therefore, his claim for deduction of the said expenses on proportionate basis between STCG and LTCG was well in order. However, the A.O after deliberating at length on the contentions advanced by the assessee was however not persuaded to accept the same. The A.O after perusing the terms and conditions in the agreement between the assessee and his portfolio manager viz. M/s Enam Assets Management Company (P) Ltd., held a conviction that PMF and PLF were service charges for making investments of assesses fund and managing the portfolio of securities. On the basis of his aforesaid observations, the A.O was of the view that as PMF and PLF charges could not be construed as an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee, therefore, the same could not be allowed as a deduction while computing the STCG in the hands of the assessee. In the backdrop of his aforesaid deliberations the A.O disallowed the PMF and PLF charges of ? 1,13,12,737/- and worked out the STCG at ? 2,67,64,581/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) being of the view that the assessee while computing the STCG on transfer of shares had rightly claimed as deduction the fees of ? 1,13,12,737/- paid to the portfolio manager, allowed the same as a deduction. The CIT(A) while concluding as hereinabove, observed as under:

“I have carefully considered the contents of the assessment order and appellant’s submissions thereof. Section 48 of the Act entitles the appellant to claim the expenditure which was incurred wholly and exclusively in connection with the transfer of asset resulting in capital gains. The word ‘in connection with’ has to be examined in terms of existence of an intimate connection between the expenditure and act of transferring the assets. It could be immaterial when the expenditure was incurred i.e. at the time of or subsequent to a transaction so long as it is wholly and exclusively spent in connection with the acquisition or the transfer. There is no warrant for importing a restriction to qualify the deduction that the expenditure must be incurred prior to passing of the title. The decisions of various High Courts in the cases of viz., Shakuntla Kantilal, (Bombay High Court) 190 ITR 56, Dr. P. Rajendran (Kerala High Court) 127 ITR 810, V.A. Vasumati (Kerala High Court) 123 ITR 94 and Compagnie financier Hamon (AAR) 310 ITR 1 support this proposition. That apart, the issue under consideration is presently covered in favour of the appellant by the decision of the Hon’ble ITAT, Pune Bench in the cases of M/s KRA Holding and Trading Pvt. Ltd and M.s ARA Trading and investments Pvt. Ltd. in appeal Nos. 1321 of 2002-03, 499 & 500 of 2004-05, 1320 & 1322 of 2005-06 and 434 & 806 of 2006-07. Having regard to the above, I am of the considered opinion that the PMS fees paid to the Port Folio Management is an allowable deduction. Accordingly, the addition made by the AO is deleted and the appellant gets relief.”

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Departmental Representative (D.R.) at the very outset submitted that the CIT(A) had erred in allowing the PMF and PLF charges of ? 1,13,12,737/- as deduction while computing the STCG arising on the transfer of shares. It was submitted by the Ld. D.R. that as PMF and PLF charges were not in the nature of expenditure incurred wholly and exclusively in connection with transfer of shares, thus the A.O had rightly disallowed the said claim of the assessee. The Ld. D.R. in support of his contention that the payment of fees by an assessee for portfolio management services was not eligible for deduction while computing the income under the head capital gain, relied on the following orders of the coordinate benches of the Tribunal:

i) Shri Homi K. Bhabha Vs. The ITO (Intl. Taxation), 3(1), Mumbai.[ITA No. 3287/Mum/2009, dated:28.09.2011]

(ii) Pradeep Kumar Harlalka Vs. ACIT, Circle 12(3), Mumbai [143 TTJ 446 (Mum)]

(iii) Capt. Avinash Chander Batra Vs. Dy. CIT, Range-2(3), Mumbai. [ITA No. 7407/Mum/2011, dated:30.03.2016]

Per contra, the assessee who had put up an appearance in person relied on the order of the CIT(A). It was submitted by the assessee that as the portfolio management fees and portfolio linked fees were incurred wholly and exclusively in connection with the acquisition or the transfer of the shares, therefore, the CIT(A) concurring with his view had rightly allowed the same as a deduction for computing the STCG arising on the transfer of shares. The assessee in support of his aforesaid contention relied on the order of the coordinate bench of the Tribunal in the case of KRA Holding and Trading Pvt. Ltd. Vs. DCIT, Circle-11(1), Pune (ITA No. 240/PN/2011, dated: 25.07.2012).

We have heard the assessee and the ld. D.R, perused the orders of the lower authorities and the material available on record. We are of the considered view that there are conflicting views of the coordinate benches of the Tribunal as regards the allowability of PMF and PLF charges as a deduction, while computing the income of the assessee under the head capital gains. We find that a coordinate bench of ITAT, Mumbai in the case of Devendra Motilal Kothari (2011)132 ITD 173 (Mum) had way back concluded that portfolio management expenses could neither be considered as cost of acquisition nor as a cost of improvement or expense incurred in connection with sale of shares. However, subsequently another coordinate bench of the Tribunal in the case of KRA Holding and Trading Pvt. Ltd. Vs. DCIT, Circle 11(1), Pune (ITA No. 240/PN/2011, dated 25.07.2012) had after considering the order of the Tribunal in the case of Devendra Motilal Kothari (supra), taken a contrary view and had concluded that portfolio management fees was allowable as a deduction while computing the capital gain on transfer of shares. The ITAT, Pune Bench while concluding as hereinabove, had taken support of the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Shakuntla Kantilal (1991)190 ITR 56 (Bom), wherein it was held that expenses incurred in connection with transfer of a capital asset was to be allowed as a deduction under Sec. 48 of the Act. Subsequently, the ITAT, Mumbai ‘C’ bench in the case of Pradeep Kumar Harlalka Vs. ACIT, Circle 12(3), Mumbai (2012) 143 TTJ 446 (Mum), observing that the judgment of the Hon’ble High Court of Bombay in the case of CIT vs. Roshan Babu Mohammed Hussein (2005) 275 ITR 231(Bom) had held its earlier judgment in the case Shakuntla Kantilal (supra) as no longer being the good law, thus followed the earlier view taken by the ITAT, Mumbai in the case of Devendra Motilal Kothari (supra) and held that the portfolio management fees was not to be allowed as a deduction under Sec. 48 of the Act while computing the income under the head capital gain. We further find that a similar view had also been arrived at by the ITAT, Mumbai in the case of Shri Homi K. Bhabha Vs. ITO (Intl. Taxation), 3(1), Mumbai (2011) 30 CCH 0520 (Mum), wherein too it was held that the portfolio management fees was not allowable as a deduction while computing the STCG on transfer of shares. In this regard we further find that ITAT, Pune Bench in the case of DCIT Vs. KRA Holdings and Trading Co. Pvt. Ltd. (2012) 54 SOT 493 (Pune), after considering the view taken by ITAT, Mumbai in the case of Homi Bhabha (supra) had arrived at a contrary view and following its earlier order had concluded that the portfolio management expenses were to be allowed as deduction under Sec. 48 of the Act while computing the STCG on transfer of shares.

We have deliberated at length on the issue under consideration in the backdrop of the aforesaid judicial pronouncements. We find that it is an undisputed fact that the assessee while computing the STCG on transfer of shares had claimed deduction under Sec. 48 of Portfolio Management Fees and Performance