9911796707
TMI Blog2012 (8) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 2. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) grossly erred in relying order of the ITAT in assessee case for the A.Y. 2004-05 for which the appeal to the High Court filed by the department is still pending. 3. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) grossly erred in not considering the assessee's nature of business, the magnitude of purchases and sale of shares and the ratio between purchases and sales of the holdings". 3. Facts of the case, in brief, are that during the assessment proceedings the AO noted that the assessee has declared Short term capital gain on sale of shares and mutual funds at Rs. 5,30,14,183/- and Long term capital gain at Rs. 1,42,31,801/-. The Short term capital gain was offered to tax whereas the assessee claimed the Long term capital gain as exempt. The assessee has treated the entire activity of dealing in shares and units as investment activity and not business activity. Following the order for A.Y. 2004-05, 2005-06 and 2006-07 the AO considered the capital gains declared by the assessee as business income and treated the profit of Rs. 6,72,45, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival arguments made by both the parties, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also gone through the decision of the Tribunal in assessee's own case. Both the parties fairly conceded that the issue stands covered in favour of the assessee by the decision of the Tribunal in assessee's own case for A.Y. 2004-05. We find the Tribunal in assessee's own case for A.Y. 2004-05 vide ITA No. 500/PN/08 order dated 31-08-2009 allowed the claim of Short term capital gain and Long term capital gain on sale of shares and redemption of mutual funds. We find following the said decision the Tribunal vide ITA No. 1320/2008 and ITA No. 434/2009 allowed the claim of Short term capital gain and Long term capital gain for A.Y. 2005-06 and 2006-07. Although the department has challenged the order of the Tribunal before the Hon'ble High Court on this issue and the Hon'ble High Court has only admitted the appeal, however no decision reversing the decision of the Tribunal was filed before us. Therefore, respectfully following the decisions of the Tribunal in assessee's own case and in absence of any contrary material brought to our notice a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above expenditure under the head 'capital gains'. The Assessing Officer has considered the claim mainly under the head 'business and profession' as he has assessed the income from share trading under the said head. There cannot be any dispute to the facts that the requirement of law for allowing an expenditure is dependent on the head under which an income is held as assessable. However, such an expenditure would become inadmissible under either of the heads if the same is against the guidelines of the regulator, i.e. SEBI. In addition to the same, in my considered opinion, the method employed by the assessee to load these expenses to the investments which are sold during the year as well as to those which are continued to be carried forward in the stock-in-trade/investment block, is clearly under a strategy to make such expenses claimable under the head 'capital gains' even though the provisions don't seem to be allowing them. The assessee has not shown the fees paid to the portfolio managers as an expenditure in the P&L account. The same has been loaded on the purchase price of shares, which are either sold or carried forward to next year. In this context, they have tried to pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the payment is not as per the agreement, as the agreement was never terminated in reality; (ii) the payment was not authorized by the SEBI Regulations, 1993, CIT(A) authority confirmed the said disallowance also for another reasons that the said payment attracts provisions of the Explanation to sub-section (1) of section 37 of the IT Act. The said fee is not allowable in view of the decision of the Tribunal of Mumbai Bench in the case of Davendra Kothari (136 TTJ 188) where the Tribunal held that when the assessee failed to demonstrate the nexus of the said expenditure with the purchase and sale transactions of the said capital assets ie securities, the fee paid to the portfolio managers is not an allowable expenditure u/s 48 of the Act. 20. Per contra, the case of the assessee is that the said decision of the Mumbai Bench Tribunal is distinguishable on facts relating to discharge of onus relating to nexus issue and also in matters of global turnover based claim of fee including the miscellaneous receipts such as dividends and interest. As per the assessee, there are other decisions to support the claim of the assessee. Further, assessee's stand is that revenue authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holly and exclusively in connection with the transfer." In other words, so long as the expenditure in question is genuine and are incurred in connection with the transfer of the securities, the expenditure is allowable from the 'full value of the consideration received or accruing', itself. Meaning thereby, the impugned expenditure is reduced from the 'gross value of the consideration received or accruing, and the 'net value of the consideration received or accruing' will be further reduced by the expenditure mentioned in clauses (i) and (ii) of section 48 of the Act. The second way of dealing with the said genuine expenditure relates to the one specified in clause (i) and clause (ii). The assessee must be given benefit of the deduction as the same is incurred wholly and exclusively for the transfer of the securities. For thesake completeness of this order, relevant para 5 & 6 are reproduced as follows: "5. It must be stated in fairness to Dr Balasubramanian for the Revenue that he did not dispute the fact of payment or even the necessity of making such a payment. His contention is that the language in which section 48 is couched does not contemplate deduction of such an amount. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctfully submitted that the fees paid have been correctly claimed as deduction in the computation of capital gains..............." 23. The scope of section 48 as per the binding judgment of the Hon'ble High court is that the claim of bona fide or genuine expenditure should be allowable in favour of the assessee so long as the incurring of the expenditure is a matter of fact and the necessity of making such a payment is the imminent and the requirement for the transfer the transfer of the asset. It is now binding on our part to take the view that the expressions 'in connection with' has wider meanings than the expression 'for the transfer'. The Revenue's contention is that the language in which section 48 does not contemplate deduction of such an amount was overruled and allowed the deduction of the fee incurred by the assessee for removal of the encumbrances, which is necessary for transfer of the asset in that case. 24. We have also perused some of the other citations relied upon by the parties to draw the boundary lines for the kind of expenditure which fall within the scope of the allowable expenditure u/s 48 of the act in computation of the capital gains. We find that all thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asset's transfer. Tribunal did not refer to the explanation given by the binding jurisdictional High Court on the provisions of section 48 of the Act. 25. From the above, it is invariably learnt that the scope of the provisions of section 48 are explained by the jurisdictional High Court and it is binding on us as they remain undisturbed as informed to us. The citation at E above did not have benefit of the said explaining of the provisions of section 48 of the Act. For allowing the claim of deduction in the computation of the capital gains, the expenditure has to be distinctly and intricately linked to the asset and its transfer and the Onus is on the assessee to demonstrate the said linkage between the expenditure and the asset's transfer. It is evident and binding that the expenditure if undisputedly, necessarily and genuinely spent for the asset's transfer within the scope of the provisions of section 48 of the Act, the claim cannot be disallowed for want of the express provisions in section 48 of the Act. 26. Wholly and Exclusively: In this regard, it is a settled law that the expression 'wholly and exclusively' is explained for the purpose of the identical expressions u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iginal clause 14(3) of SEBI (Portfolio Managers) Rules & Regulations 1993 which governs the portfolio manager which bans the payment of fee to the portfolio manager. In this regard, Ld Counsel filed a Gazette copy showing the amended clause 3 vide SEBI (Portfolio Managers) (Amendment) Rules, 2002 which provides for return based fee also. The said clause originally came into force with effect from 7.1.1993, a date of publication in the official Gazette, whereby the SEBI provided for the fee relating to the portfolio managers vide para 3(a) which has come into effect w.e.f. 11.10.2002. The Securities & Exchange Board of India (Portfolio Managers) Regulations, 1993 provide that the discretionary portfolio manager is obliged to individually and independently manage the funds of each client in accordance with the needs of the client. These Regulations, 1993 provide that fee to be charged may be a fixed amount or a return based fee or a combination of both. We have extracted the amended clause 14(3) and the same is as follows. "(3)(a) : The portfolio manager shall charge an agreed fee from the clients for rendering portfolio management services without guaranteeing or assuring, either d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt paid for removing an encumbrance was allowable u/s 48(i). In coming to this view the Court observed that without this payment the sale could not have been materialized and hence there would have been no question of the capital gains being brought to tax. In the present case the capital gains have arisen as a result of the efforts of the PM for which the fees have been paid. A Mumbai Bench of the Tribunal in the case of DAVENDRA KOTHARI (136 TTJ 188) has confirmed disallowance of PMS fees while computing capital gains. In that case fees were paid based on value of the assets. The Honourable Bench has observed at Para 7 of the said order that the CIT(A) found that the,- quantification of fees: was based only on either the market value of the asset or the net value of the assets of the assessee as held either at the beginning or at the end of each quarter. At Para 8 of the Order, the Honourable Bench has observed that the CIT(A) held that the assessee was paying the fees as aforesaid to portfolio managers even on the interest/dividend received on the investments and therefore the CIT(A) came to hold that it could not be said that there was nexus between the PMS fees paid and pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r natural commercial meaning as men of trade and commerce would unmistakably understand. Investments in securities are valued at cost by the appellant. In view of the direct nexus between the fees and the role of the PM established by us it is not difficult to appreciate that such fees form part of the cost of acquisition of the portfolio. The SC in the case of BHARAT EARTH MOVERS (245 ITR 428)(SC) in the context of allowability of provision for leave encashment referred to the following passage from its decision in the case of Calcutta co. Ltd vs. CIT (1959) 37 ITR 1 (SC) wherein it was held that merely because there is some difficulty in the estimation of the liability would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. In the present case merely because some mathematical exercise is involved in loading such fees to individual transactions of purchase would not mean that such fees do not form part of cost of acquisition or have nexus therewith Accounting Standard 13 (Accounting for Investments) issued by ICAI provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported in 92 ITR 7 and the observation of Their Lordships thatit will not make any difference whether the interest was paid on the date of purchase or whether it is paid subsequently to exclude the interest amount from the actual cost would lead to anomalous results. In the case of CHALLAPALLI SUGARS LTD (98 ITR 167) the SC held that interest paid on borrowed money for purchasing plant and machinery before commencement of production would form the part of actual cost for the purpose of depreciation allowance. It held so following the accepted accountancy rule for determining the cost of fixed assets. In this case preoperative interest would have to be allocated to the cost of individual fixed assets acquired during construction period of a new company (this was before the block of assets concept was introduced) and yet the Court held so. By the same logic expenses incurred in relation to the portfolio should be allowed to be capitalized in terms of AS 13. It will be appreciated from the submissions made above that this is not so in the present case where a live nexus has been clearly established and on that basis even the accounts have been maintained; investments have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities are transferred by way of sale, the resultant gains have to be dealt with as per the provisions of section 48 of the Act. 34. The provisions of section 48 of the Act have already been analysed in the preceding paragraphs in the light of the explaining by the jurisdictional high court in the case of Shantilal Kantilal (supra). It is a settled issue now at the level of the jurisdictional High Court in the case of Shantilal Kantilal (supra) that the rightful expenditure incurred in connection with the transfer of the capital asset/securities should be allowed notwithstanding the inadequacy of the express provisions of section 48 of the Act. It is also binding on us to interpret the said provisions of section 48 that the same are read down by the Hon'ble High Court in that case and the same remains undisturbed till date. Consequently, the expenditure which is distinctly and directly connected to the transfer, which is interpreted to be of wider meaning and connotation, are required to be allowed. We also interpreted in the preceding paragraphs that the expression 'wholly and exclusively in connection with such transfer' as wider in scope and in our opinion, it is no so nar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement fee was paid to M/s Enam and others and the same is in accordance with the contents of the bilateral agreement. The services rendered by M/s Enam are also undoubted. The twin services relating to the said portfolio management include: (i) acquisition of securities for the assessee-client and (ii) sale of the said securities for the assessee-client. The payment of fee is undisputedly unspecific to the individual shares/securities. In fact, the revenue takes an argument before us that to become the part of the cost of the acquisition of the asset, the expenditure ie fee paid the Enam, has to be asset-specific or share-specific per the provisions of section 48 of the Act. In our opinion, the same is absurd given the facts of the case where the portfolio investment attracts the provisions of section 48 of the Act and the asset involved is not land or building and in fact the assets involved are the securities/shares/mutual funds etc. In matters of transactions involving securities/shares/mutual funds etc, expenditure/fee paid to portfolio manager is never each share specific and in fact they are paid on volume based. Therefore, the revenue's argument has to be rejected on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present case, in our considered opinion the claim of the must not be rejected for want of the express provisions in section 48 of the Act and such an interpretation goes with the spirit of the judgment of the Jurisdictional high court in the case of M/s Shakunthala Kantilal (supra). Further, as per the principles of accounting ie AS-13, as discussed above, the expenditure of this kind is allowed to be loaded to the cost of acquisition of the securities. Therefore, in principle, the claim of the assessee is allowable under the provisions of section 48 of the Act. Hon'ble Supreme Court in the case of UP State Industrial Development Corporation (225 ITR 703) was dealing with the issue of loading of an underwriter commission to the cost of shares, held that the general principles of accounting have to be observed. Regarding the objections of the revenue regarding the quantification of the claims of expenditure, in our opinion, the judgments of the Supreme Court in the cases of Bharat Earth Movers Ltd (supra) and the Culcutta Co Ltd (supra) helps the assessee and therefore, the claim of the assessee is allowable. Accordingly, relevant ground relating to the second issue. 10. The abov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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