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TMI Blog2012 (8) TMI 1032X X X X Extracts X X X X X X X X Extracts X X X X ..... securities through Enam Asset Management Company Pvt. Ltd. The AO asked the assessee to furnish details in respect of the same. From the various details furnished by the assessee the AO noted that the assessee during the year had agreement with two PMS providers for purchase and sale of securities including derivatives. 2.1 He noted that the agreement with PMS clearly starts with assessee appointing the PMS, i.e. portfolio management service provider as his agent to carry all the transactions in his behalf, Eg. The Clause 2 of the agreement with Enam Asset Management Company Ltd. reads as under : 2.01 The client hereby appoints the Portfolio Manager for the purpose of investing the funds of the client and managing the clients portfolio of securities on the terms and conditions herein contained. 2.02 As the client s portfolio manager, the Portfolio Manager shall act in a fiduciary capacity and as a trustee and agent of the client s account. 3. After considering the various arguments advanced by the assessee and considering the frequency, volume, period of holding of the shares, organised activity of the assessee in purchase sale of shares to maximise the profits and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares when the market goes up and buy the shares at lower prices. In the case of Enam the agreement directly refers to the profit sharing ratio between the assessee and the PMS provider over and above the fixed management charges of 0.5%. The terms are as under : a. Profit upto 15% - NIL b. Profit above 15% - 80.20 The above arrangement clearly shows the business intention of the assessee in carrying out the share trading activity through PMS provider. 8.6 The entire transactions are handled by PMS providers care carried out in a thorough professional manner. The organised and systematic approaches to transactions by PMS providers clearly show intention to maximise the profits by increasing the turnover rather than to make money by earning dividends by holding the shares long enough. 8.7 Since the PMS providers act as agent to the assessee hence the way they conduct the business directly indicates the intentions of the assessee too. 8.8 The volume of transactions and the diverse nature of portfolio are also indicative of the business intentions. Alternatively speaking, if the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From the above details it can be seen that the sole motive behind the share transactions was to benefit by trading as the sales have been just prior to the dividend date in number of cases. Hence the dividend earning and holding of shares was not the main intention of the assessee. The main intention was to earn by quick trading. The assessee has not sold the shares to utilise the sale proceeds for some personal needs but has circulated the funds for buying new scrip. 3.1 The AO held that since the income is treated as business income the fees paid to PMS providers will be an allowable expenditure. However, the same is not allowable if such income would have been treated as capital gain. The AO also disallowed an amount of ₹ 5,79,460/- u/s.14A being expenses relatable to earning dividend income. 4. In appeal the learned CIT(A) following the decision of the Jurisdictional High Court in the case of Gopal Purohit reported in 228 CTR 582 (Mumbai) and various other decisions relied on by the assessee before him treated the income from purchase and sale of shares through PMS as income from Short term and Long term capital gain. So far as the disallowance u/s.14A is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals) grossly erred in holding that the transactions in question were not in the nature of the assessee s business, merely for the reason that the same had been carried out through a discretionary Portfolio Management Service and also in holding that, at the most, the transactions could be considered as the business of the PMS provider. 7. The learned Commissioner of Income Tax (Appeals) grossly erred in coming to the above erroneous conclusion without appreciating that the assessee s agreement with the PMS provided categorically referred to the latter as agent and it also provided for profit-sharing between the assessee and the PMS provider in addition to payment of fees. Such arrangements of agency and profit-sharing are alien to a transaction in the nature of investment. 8. The learned Commissioner of Income Tax (Appeals) grossly erred in failing to appreciate that even if it is assumed, without conceding, that the assessee did not participate in the day to day affairs of transactions which were allegedly taken care of by the PMS provider, the same by itself would not make the assessee an investor vis-a-vis the impugned transactions in as much as the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estored. 3. The appellant craves leave to add, alter or amend any or all the grounds of appeal. 4.3. The assessee has filed the CO with the following grounds in view of disallowance of PMS fees: 1. The learned CIT(A) erred in holding that the expenditure incurred in the form of fees and other payments to Portfolio Management Services (PMS) providers would not be allowed as an expenditure while computing the capital gains. 2. The learned CIT(A) failed to appreciate that the payment made to PMS providers was expenditure incurred wholly and exclusively in connection with transfer and therefore, the claim was allowable. 3. Without prejudice to the above grounds, the learned CIT(A) erred in not appreciating that the amount paid to PMS providers ought to have been reduced from the sale consideration while computing capital gains. 4. The respondent craves leave to add, alter, amend, or delete any of the above cross objections . 4.4 After hearing both the sides, the additional grounds filed by the revenue are admitted for adjudication. 5. The first issue raised in the grounds by the revenue relates to the order of the CIT(A) in treating the profit from purchase an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case may be by the coordinate Benches of the Tribunal. Respectfully following the decision of the coordinate Bench of the Tribunal in the case of KRA holding and Trading Pvt. Ltd. (Supra) as well as the decision of Hon ble Bombay High Court in the case of Gopal Purohit (Supra) we uphold the order of the CIT(A) in treating such profit from purchase and sale of shares as capital gain. The grounds raised by the revenue on this issue are accordingly dismissed. 7. The second issue raised by the revenue and the grounds in the CO by the assessee relates to the order of the CIT(A) in deleting the disallowance made by the AO u/s.14A read with Rule 8D other and holding that PMS fees NSDL charges as not an allowable expenditure from capital gain. 8. After hearing both the sides we find the AO noted that the assessee has earned dividend from the activities of share transactions in personal account from PMS and from mutual funds investment. The total dividend received during the year and claimed exempt was ₹ 6,36,975/-. Similarly, the assessee has claimed the profit on long term capital gain on mutual funds at ₹ 1,92,21,750/- as exempt u/s.10(38) of the Income Tax Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee himself on the property which was acquired without any encumbrance is not an allowable deduction u/s.48(1). However, in the case of the assessee there was no such encumbrance. Referring to the decision of the Pune Bench of the Tribunal in the case of KRA Holding Trading Ltd.(Supra) he submitted that the reference of the decision in the case of CIT Vs. Shakuntala Kantilal 190 ITR 56 by the Pune Bench of the Tribunal was unnecessary. So far as the decision of the Mumbai Bench of the Tribunal in the case of Homi K. Bhabha (Supra) he submitted that the Tribunal in the said decision has not considered the decision of Hon ble Bombay High Court in the case of CIT Vs. Solapur District Milk Producers and Process Unit Ltd. reported in 315 ITR 304. He submitted that the decision of the Pune Bench of the Tribunal in the case of KRA Holding Trading (P) Ltd. has to be followed and the fees paid to the PMS provider has to be allowed as an expenditure from the short term capital gain or long term capital gain. 10. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the various decisions cited before us. So far as the deletion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36 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 have listed three reasons cumulatively for denial of deduction ie not as per the agreement; (ii) not authorized by the SEBI Regulations, 1993 and therefore it attracts the provisions of the Explanation to sub-section (1) of section 37 ie infringements of the law, and the said reasons do not stand the test of legal scrutiny as the IT authorities misinterpreted the facts. In this regard, the facts are that the fee paid to assessee as per the agreement ie at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived 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 the sake of 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. Reference in this regard was made to section 48 of the Act to show that the payment herein could be neither be termed as expenditure incurred wholly and exclusively for the transfer or the cost of acquisition or of any improvement thereto .. 6. In order to appreciate DR submission, it is desirable to refer to the provisions of section 48 which read as under: The section (section 48) broadly contemplates three amounts for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirement 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 these citations invariably followed the jurisdictional high court judgment in the case of Santhilal Kantilal (supra). A. Calcutta High Court held in the case of Gopeenath Paul and sons Anr (278 ITR 240) that when assets of the assessee GNP, earlier carrying on business in the name of GSM could not be sold as going concern under orders of Court without meeting the liabilities of GSM towards the Bank, payments for meeting such liabilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 used in section 37 of the Act. In the case of Sasoon j David Co P Ltd v CIT 118 ITR 261(SC), Hon ble Supreme Court explained the twin adverbs stating that the first adverb, wholly refers to the quantum of the expenditure, the sum of money spent and the second adverb exclusively has reference to the purpose behind the expenditure and not the motive or object of expenditure. 27. After explain the scope of section 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 directly or indirectly, any return and the fee so charged may be a fixed fee or a return based fee or a combination of both. Thus, in our opinion, the amended provisions allows the payment of fee to AMC on return based fee and therefore, all the three reasons of the revenue for denying the claim of deduction in favour of the assessee, as discussed in the above paragraphs of this order, require to be rejected and in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 purchase and sale of investments. The Honourable Mumbai Tribunal has laid stress on the said findings of the CITA. Present case of the appellant is clearly distinguishable in the light of the fact that return based fees is also payable in respect of profits earned on sale of investments and therefore the PMS fees has a direct nexus with the purchase and sale of investments during the year and fees is not pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provides that cost of an investment includes acquisition charges such as brokerage, fees and duties. The method of accounting followed by the company in respect of fees paid is to proportionately load these fees on the securities handled by the Portfolio Manager during the year [i.e. opening portfolio plus investments made during the year]. Automatically these fees are taken into account for com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 been accounted for inclusive of proportionate fees and said fees are also loaded to unsold investments as at the year end. It is respectfully submitted that in the present case assessee has demonstrated how there is a nexus between the fees and the role of the PM directly affecting purchases and hence cost of acquisition. 32. From the above, it is evident that the unlike in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evel 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 narrow to not to accommodate the portfolio fee , which is paid undisputedly and obviously for acquisition and sale of the securities/unit if any. Therefore, we are of opinion that the impugned expenditure is (i) directly connected to the asset and its transfer, (ii) it is genuinely incurred as accepted by the revenue; (iii) it is a bona fide payments made as per the norms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the ground of impracticability or non-existent in this line of investment activity alone. Considering the genuineness and essentiality of the payment of fee to the Portfolio manager ie ENAM and undisputedly for the predominantly for the said twin purposes of acquisition and sale of the securities, the claim has to be allowed. Further, it is an admitted fact that the bifurcation of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind 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 Calcutta 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 above decision of the Tribunal was not available before the CIT(A) while adjudicating the issue. We find the revenue has gone on appeal against the order of the Tribunal on the issue of treatment of income from Portfolio Management Scheme as Capital gain or Business income . The relevant order of the Hon ble High Court in ITA No. 3482 of 2010 dated 19-07-2011 reads as under: Hea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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