2025 (4) TMI 212 - AT - Income Tax

Disallowance of PMS fees in computing the capital gain - whether CIT(A) erred ignoring Provisions of Section 48 as per which the expenses which are not wholly and exclusively incurred in connection with transfer of capital assets are not deductible in computing the capital gain and ignoring the fact that PMS fees is indirectly related to equity or derivative transactions. HELD THAT - We are inclined to hold that the PMS expenses incurred by the assessee by way of fee to the portfolio managers has to be treated as expenses wholly and exclusively incurred in connection with the business of the assessee and therefore are allowable u/s 37 of the Act. So far as the decision relied on by the ld DR in the caser of Devendra Motilal Kothari 2010 (3) TMI 794 - ITAT MUMBAI we find the same to be rendered in the context of whether the PMS fee was deductible in computing capital gain. But since we have allowed the issue raised by the assessee in Rule 27 of the ITAT Rules the decision of the coordinate bench is not applicable to the facts as we have held that PMS Fee is allowable as business expenses u/s 37 of the Act. Since we have allowed the issue raised by the assessee under Rule 27 of ITAT Rules the appeal of the Revenue become infructuous and is accordingly dismissed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the delay of 101 days in filing the appeal by the Revenue can be condoned.
Whether the Portfolio Management Services (PMS) fees can be deducted as an expense when computing capital gains, in light of Section 48 of the Income Tax Act.
Whether the assessee is entitled to challenge the dismissal of a ground by the Commissioner of Income Tax (Appeals) [CIT(A)] under Rule 27 of the ITAT Rules, despite not filing an appeal or cross-objection.
Whether the PMS fees should be treated as a business expense under Section 37 of the Income Tax Act, given the nature of the assessee's business activities.

ISSUE-WISE DETAILED ANALYSIS

Condonation of Delay in Filing the Appeal

Relevant Legal Framework and Precedents: The Tribunal considered the reasons provided by the Revenue for the delay, which included the time taken in obtaining various administrative approvals due to a heavy rush of scrutiny reports and audit objections.
Court's Interpretation and Reasoning: The Tribunal found the reasons cited by the Revenue to be bona fide and sufficient, thus condoning the delay.
Conclusion: The delay in filing the appeal was condoned, allowing the appeal to proceed.

Deductibility of PMS Fees in Computing Capital Gains

Relevant Legal Framework and Precedents: Section 48 of the Income Tax Act specifies that only expenses wholly and exclusively incurred in connection with the transfer of a capital asset are deductible.
Court's Interpretation and Reasoning: The CIT(A) had previously held that the PMS fees were genuine and allowable while computing capital gains. However, the Revenue challenged this, arguing that PMS fees are indirectly related to equity or derivative transactions and not directly to the transfer of capital assets.
Conclusion: The Tribunal upheld the CIT(A)'s decision, allowing the PMS fees as a deduction, as they were considered genuine expenses incurred in connection with generating capital gains.

Application of Rule 27 of ITAT Rules

Relevant Legal Framework and Precedents: Rule 27 allows a respondent to support an order on any grounds decided against them, even if they have not filed an appeal or cross-objection.
Court's Interpretation and Reasoning: The Tribunal referenced the Delhi High Court's decision in Sanjay Sawhney vs. Principal Commissioner of Income-tax, which supported the respondent's right to defend an order on grounds decided against them.
Conclusion: The Tribunal allowed the assessee to challenge the dismissal of a ground by the CIT(A) under Rule 27, thereby supporting the order of the CIT(A) on all grounds, including those decided against the assessee.

Treatment of PMS Fees as Business Expense

Relevant Legal Framework and Precedents: Section 37 of the Income Tax Act allows for the deduction of expenses wholly and exclusively incurred for business purposes. The Tribunal considered the nature of the assessee's business as a Non-Banking Financial Company (NBFC) engaged in investment activities.
Court's Interpretation and Reasoning: The Tribunal found that the PMS fees were incurred wholly and exclusively in connection with the business of investment in shares and securities. It referenced the decision in Mafatlal Holdings Ltd. and other relevant cases to support this interpretation.
Conclusion: The Tribunal concluded that the PMS fees should be treated as a business expense under Section 37, thereby allowing them as a deduction.

SIGNIFICANT HOLDINGS

The Tribunal condoned the delay in filing the appeal, allowing it to proceed.
The PMS fees were deemed deductible as a business expense under Section 37 of the Income Tax Act, rather than in computing capital gains under Section 48.
The Tribunal upheld the assessee's right under Rule 27 to challenge the dismissal of a ground by the CIT(A), supporting the order on all grounds, including those decided against the assessee.
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the deduction of PMS fees.

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