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TMI Blog2012 (8) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... curities, the claim has to be allowed - the claim of the must not be rejected for want of the express provisions in section 48 - decided in favour of assessee. - ITA NO. 356/PN/2011, ITA NO. 240/PN/2011 - - - Dated:- 25-7-2012 - Shri Shailendra Kumar Yadav and Shri R.K. Panda, JJ. Assessee by : Sri M.P. Mahajani Sri R.D. Onkar Department by : Sri Mukesh Verma, CIT ORDER PER R.K. PANDA, AM : These are cross appeals. The first one is filed by the Revenue and the second one filed by the assessee and are directed against the order dated 29-10- 2010 of the CIT(A)-I, Pune relating to the Assessment Year 2007-08. For the sake of convenience, these were heard together and are being disposed of by this common order. ITA No. 356/PN/2011 (By Revenue) : 2. Grounds raised by the Revenue are as under : 1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in treating the income earned from sale and purchase of shares as Capital gain instead of business income as found out by the AO when the assessee had carried out transaction on a large scale in a systematic and continuous manner an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld of portfolio managers. The above finding of the Assessing Officer has been already confirmed by my learned predecessor in A.Y. 2004-05 to A.Y. 2006-07. However, it has been brought on record by the assessee that the Hon ble ITAT, B Bench, Pune in an appeal filed by the assessee against the order of the Ld. CIT(A)-I, Pune for A.Y. 2004-05, has allowed the appeal on this issue in ITA No. 500/PN/2008 (A.Y. 2004-05) dated 31-08-2009. In view of the above, the assessee has made prayer to follow the finding of the Hon ble ITAT, Pune given in this case on this issue It has been found out that the Department has preferred an appeal against the above order of the ITAT and the matter is pending for adjudication with the Hon ble High Court. However, as the order of the ITAT given on this issue in the case of the assessee is enforceable and has not been stayed, the judicial discipline demands that the same is required to be followed despite the opinion of this forum. There is no dispute that the facts and law are same and in view of the same following the judgment of the Hon ble ITAT, the appeal is allowed subject to the final finding of the Superior Courts. 4.1 Aggrieved with such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-01-2005. However, the AO was not convinced with the explanation given by the assessee. He noted that similar issue was decided against the assessee for assessment year 2004-05 to 2006-07 wherein the payments has been disallowed and added back to the business income of the assessee which has been confirmed by the CIT(A) and the matter is pending before the Tribunal for adjudication. Therefore, he disallowed the payment of ₹ 2,11,95,334/- treating the same as termination fees computed on profit sharing basis and not specifically provided in the agreement and not as per SEBI rules and regulations. 8. In appeal the learned CIT(A) upheld the action of the AO by holding as under : I have carefully considered the above ground along with the findings given by the Assessing Officer, the learned CIT(A) and the Hon ble ITAT, Pune till date in AYs. 2004- 05 to the present appeal. It is observed that the assessee has engaged the services of portfolio managers to whom different kinds of payments totalling to ₹ 2,11,95,334/- was made in this assessment year. This has been disallowed on various reasons including the reason that the payments were not as per the guidelines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to sale. The payments are made for different services, which are distinct from the act of purchase or sale. They are incurred even without the actual incidence of sale or purchase. The assessee loads these expenses the cost from year to year in respect of shares held for longer than a quarter. The argument and the accounting entries are clearly intended to change the colour of payment. These cannot be allowed under the head capital gains . In view of the above, Ground No. 2 is treated as dismissed . 8.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 9. We have heard the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We find the Tribunal in assessee s own case vide ITA No. 500/PN/2008 for assessment year 2004-05 has decided the issue and allowed the claim of portfolio management fees by holding as under : 19. We heard the parties and perused the orders of the revenue. Allowability of the fee paid to the M/s Enam, the portfolio manager for purchase and sale of the securities under section 48 of the Act is the issue for adjudication before us. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above rival positions, we proceed to examine the scope of the provisions of section 48 of the Act, amended SEBI regulations in matters relating to fee payable to Portfolio managers, the matters relating to the distinguishing of the decisions cited by the revenue etc. A. Scope of the Provisions of section 48 of the Act: 22. Section 48 provides for the method of computation of capital gains. The relevant provisions read as follows: The income chargeable under the head Capital gains shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer, (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. Hon ble Jurisdictional High Court has an occasion to explain the above provisions of section 48 of the Act in the case of CIT v Shakuntala Kantilal 190 ITR 56 (Bom) explained the same and held that the deductibility of certain expenditure must considered favorably to the assessee as the provisions of clause (i) and (ii) are wider. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale transaction with M/s.Cosmos Co-op Housing Society Ltd. under the agreement dated March 30,1967, would not, rather could not, have materialized. If this transaction had not materialized there would perhaps have been no question of capital gains. The sale would then have taken place at the rate of ₹ 29 per sq. yard as against ₹ 51 per sq. yard. One way of looking at the problem could be to say that the full value of the consideration in this case was not the apparent consideration, i.e. ₹ 2,58,672/-, but ₹ 2,23,168/- (i. e 2,58,672 minus ₹ 35,501). The Legislature, while using the expression full value of consideration , in our view, has contemplated both additions as well as deductions from the apparent value. What it means is the real and effective consideration. That apart, so far as clause (i) of section 48 is concerned, we find that the expression used by the Legislature in its wisdom is wider than the expression for the transfer . The expression used is the expenditure incurred wholly and exclusively in connection with such transfer . The expression in connection with such transfer is, in our view, certainly wider than the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the expenditure and the act of transferring shares is established. C. In the case of Bradford Trading co P Ltd, the Madras High court held that the amount paid by the assessee to a third party to settle the pre existing claims against the transfer of the assets as also litigation expenses constituted expenditure incurred wholly and exclusively for transfer of capital asset and was deductible in computation of capital gains; the amount reimbursed by vendee to the assessee towards such claim constituted part of sale consideration but deductible while computing capital gains . D. Bombay High Court in the case of Abrar Alvi (247 ITR 312) held that the amount paid by the assessee to his son to resolve the property dispute was an allowable expenditure in computing the capital gains. Same High court in the case of Miss Piroja C Patel (242 ITR 582) held that the compensation paid by the assessee to the hutment dwellers is an allowable expenditure in computing the capital gains. E. In the case of Motilal Kothari vs DCIT (136 TTJ 188), the Mumbai Tribunal held that the payment of fee to the PMS to discharge his contractual liability did not amount to diversion of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irement or necessity of the said payments; (iii) quantitatively speaking in view of the adverbial expression, wholly used in section 48(i) of the Act, we find that the payment of fee @ 5% only restricted to the NAV of the securities and not only the global turn over including the other income; (iv) regarding the purpose of payment in view of the adverbial expression, exclusively used in section 48(i) of the Act, we find that the same is intended only twin purpose of the acquisition of the securities and also for sale of the same; (v) the NAV is defined in Para 1(d) as the net asset value of the securities of the client and the assessee calculated the impugned fee is linked to the securities value only and not includes other income such interest or dividend etc; (v) considering the contents of the para 7.01(c), termination fee upto 5% will be payable on the net asset value (NAV) of the Portfolio of the client as on the date of termination of the agreement period and not the agreement itself and therefore payment is period specific; (vi) it is a fact that the clause 14(3) was amended subsequently and therefore, the action of the revenue is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was already extracted in the preceding paragraphs. In the light of the above undisturbed proposition, our attention is restricted to the limited issue of if the impugned fee paid to the M/s Enam is allowable u/s 48 of the Act or not. Loading of the expenditure to the cost of the shares, distinguishing of the Tribunal s order in the case of Devendra Kothari (supra): 31. Ld DR for the Revenue relied on the above decision of the Tribunal and mentioned that the order of the CIT(A) does not call for any interference despite the fact that the order is not considered the above citations. In this regard, Ld Counsel filed at our request a brief note on the issue of loading and other ancillary issues and the relevant portions are imported for this order and the same are as under: The method of accounting followed by the company in respect of fees paid is to proportionately load these types of fees as part of the purchase cost of the securities during the given period. Automatically these fees are taken into account for computing capital gains or the carrying cost of unsold investments. There is a direct and proximate nexus between the fees paid and the process of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is could be considered differently so as to constitute cost of either acquisition or as expenditure in connection with transfer. The assessee could not demonstrate how allocation of fees had been made. It could not furnish details of how or the basis on which allocation of said fees was possible. Further fees had to be paid even when no purchase or sale took place. The CIT(A) had held that it was not possible to break up the fees so as to hold that the same was relatable to purchase or sale of shares. Further, fees were paid even on interest accrued and dividend received. The Tribunal held that the basis on which fees were paid is such that there was no relationship with either purchase or sale. In view of this it held that there was no nexus with purchase or sale. It is respectfully submitted that the Honourable Tribunal ought to have independently determined whether the fees were paid for an activity which had a direct nexus with the purchase or sale of the shares instead of allowing itself to be persuaded merely by the difficulty in allocating such fees to purchases by a directly conceivable basis. In the present case before You Honours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares whether the underwriting commission received from the client, should be treated as an item of income or an item that would go to reduce the cost of acquisition of such devolved shares. The Supreme Court, applying the well accepted proposition that for the purposes of ascertaining profits and gains ordinary principles of commercial accounting should be applied so long as they are not in conflict with any express provision of the Act upheld the contention of the assessee which it found to be in consonance with the general principles of accountancy governing underwriting contracts. In the present case since the Department is not contending that the accounting practice followed by the company is contrary to general principles of accountancy governing PM contracts the above ratio would squarely apply. As a matter of fact the lower authorities have not disputed the correctness of the method of allocation of PMS fees or found it contrary to accounting practice. The Hon ble Pune Tribunal in case of S.Balan (308 ITR 151 (T PUNE) held that interest paid on monies borrowed for acquisition of shares would form part of cost of acquisition. Undoubtedly loading intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on does not bar the assessee from claiming the expenditure. The claim of the assessee must be allowed once the basis of quantification is scientific and reasonable. The method of accounting followed by the company consistently in respect of fees paid is to proportionately load these fees on the securities handled by Portfolio Manager during the year. FINDINGS OF THE TRIBUNAL 33. Thus, the issue for adjudication relates if the payment of fee paid to the portfolio manager ie Enam for the twin purposes of (i) purchase of investments/securities and (ii) sale of the same is an allowable deduction u/s 48 of the Act or not. The same has to be decided in the context of settlement of the disputes relating to correct head of income. In other words, the issue relating to head of income for taxing the gains on sale of the said investments/securities has been decided by the Tribunal in the first round of the appeals and the Tribunal held that the portfolio investment is not the business activity but it is an investment activity relevant gains are taxable under the head capital gains as accounted by the assessee. It is so held in the own case of the assessee vide 499 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the said ratio in the case of Shantilal Kantilal (supra) accommodate the claim of such expenditure legally. 35. Further, the decision of the Tribunal in the case of Devendra Kothari (supra), which was heavily relied upon by the Ld DR for the revenue unfortunately did not refer to the said read down interpretation in the cited judgment of the jurisdictional High Court in the case of the Shantilal Kantilal (supra). In any case, we find the said order of the Tribunal is distinguishable on fact in general and the discharging of the onus of the assessee in demonstrating the direct linkage of the expenditure to the shares as well as the claim of fee on the entire turnover on global basis ie not restricted to investments only. As such, it is a settled issue that the expression in connection with such transfer enjoys much wider meaning and therefore, the fee paid to the portfolio manager in our opinion has to be construed to have been expended for the purposes of acquisition and transfer of the investment of the securities. Consequently, adjudication of the issue of allowability of the said expenditure under clauses (i) or (ii) of section 48 of the Act is merely an academic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of acquisition of the securities and the sales of the same. The expenditure is arrived at on profits sharing basis, which is now allowable basis by the SEBI. The expenditure is composite one as it is for the both the purposes. There is no bifurcation either by the assessee or by the revenue. In our opinion, there is no requirement of bifurcation of the expenditure ie a segment to form part of the cost of acquisition and other segment relating to transfer of securities to reduce the profits as it is not the case of the revenue that it shall make some difference from the tax point of view. Therefore, we resist from entering into that controversy. 37. Next, we proceed to explain the expression such transfer used in section 48 of the Act. The expression transfer is defined section 2(47) of the act and it is an inclusive one. However, there is no explanation as to from which point the concept of transfer begins. Does it start from the point of acquisition of the asset/share? Thus, in our opinion, the expression transfer involves various subcomponents and the first sub-component must of purchase and possession of the impugned securities. Unless the assessee is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be assessed under the head capital gains instead of being assessed under the head profit gains of business or profession ? Nothing was filed before us to substantiate that the Revenue has gone on appeal against the order of the Tribunal allowing the claim of Portfolio Management fees as an expenditure from such capital gains. 11. The decision of the Mumbai Bench of the Tribunal in the case of Homi K. Bhabha Vs. ITO was brought to our notice by the learned DR wherein it was held that Portfolio Management Scheme fees is not deductible against capital gains. The decision of the Pune Bench of the Tribunal in the case of KRA Holding Trading was not followed by the Mumbai Bench in the above cited decision. The Mumbai Bench following other decisions of the coordinate Benches of the Tribunal declined to follow the decision in the case of KRA Holding Trading (Supra). It is the settled proposition of law that when two view are possible on the same issue the view which is favourable to the assessee has to be followed. [CIT Vs. Vegetable Products 88 ITR 192 (SC)]. Further, in the instant case the Tribunal in assessee s own case has already taken a view in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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