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TMI Blog2018 (7) TMI 931X X X X Extracts X X X X X X X X Extracts X X X X ..... dent : Shri Apurva Shah, (assessee in person) ORDER PER RAVISH SOOD, JUDICIAL MEMBER: 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 (for short Act ), 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 groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 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 entities 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 propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011, dated: 25.07.2012). 6. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve that as per Sec. 48 of the Act, an expense is to be allowed as a deduction while computing the income of the assessee under the head Capital Gain only if (i) such expenditure is incurred wholly and exclusively in connection with the transfer of the capital asset; or (ii) is attributable to the cost of acquisition of the assets or the cost of any improvement thereto. We are of the considered view that PMF and PLF charges can neither be considered as cost of acquisition of the shares and securities, nor the same could be related to the cost of any improvement thereto. We are further of a strong conviction that the said fees paid by the assessee to the portfolio manager can by no means be treated as an expenditure incurred wholly and exclusively in connection with sale of shares and securities. Rather, the assessee in lieu of the services so rendered had agreed to pay to the portfolio manager a base fee viz. PMF of half percent (0.5%) of the total net asset value (market value of assets inclusive of all securities and cash balances) under management at the beginning of each quarter. Still further, as is discernible from the agreement between the assessee and his portfolio manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observing as under : 9. We have considered the rival contentions and also perused the material available on record including case laws relied upon by the rival parties. We have observed that the assessee has paid portfolio management services expenses of ₹ 22,64,272/- to portfolio managers namely ICICI Prudential Asset Management Company Limited and Optimix ING for managing portfolio management services (PMS) account s of the assessee. These charges of ₹ 22,64,272 being portfolio management fees are stated by the assessee to be paid on purchases and sales of shares and the same has been disallowed by the authorities below , except to the tune of ₹ 2,59,879/- which was allowed by the CIT(A) towards PMS charges on sale of shares on which short term capital gains has been earned and the Revenue has challenged the same before the Tribunal, while the assessee is in appeal for the disallowance by the CIT(A) of the rest of the PMS expenses of ₹ 20,04,393/- vide this appeal. It is an undisputed and admitted position between the rival parties that the assessee has earned capital gains on sale of shares held under Portfolio Management Services account of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther to decide whether PMS charges paid by the assessee is allowable as deduction as per provisions of Section 48 of the Act, we must analyze the statutory and legal framework within which portfolio managers carry on their activities in India and their roles and responsibilities in discharging their duties. The business activities of portfolio managers in India are regulated by Securities and Exchange Board of India Act,1992(15 of 1992) (in short SEBI Act,1992 ) . The SEBI Act,1992 provides for an establishment of the Board (Hereinafter called the SEBI ) to protect the interests of investors in securities and to promote the development of, and regulate , the securities market and for matters connected therewith or incidental thereto. It is provided in Chapter IV of the SEBI Act,1992 which deals with power and functions of the Board u/s.11(1) of SEBI Act,1992 that it shall be duty of the SEBI to protect the interests of investors in securities and to promote the development of, and regulate , the securities market , by such measures as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve the objects of SEBI Act,1992 , the Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or industry; ( iii) type of instruments and proportion of exposure; ( iv) tenure of portfolio investments; ( v) terms for early withdrawal of funds or securities by the clients; ( vi) attendant risks involved in the management of the portfolio; ( vii) period of the contract and provision of early termination, if any; ( viii) amount to be invested subject to the restrictions provided under these regulations; ( ix) procedure of settling client's account including form of repayment on maturity or early termination of contract; ( x) fees payable to the portfolio manager; ( xi) the quantum and manner of fees payable by the client for each activity for which service is rendered by the portfolio manager directly or indirectly (where such service is out sourced); ( xii) custody of securities; ( xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager; ( xiv) the terms of accounts and audit and furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, 2006. 3. In the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993: ( i) in regulation 2, clause (d) shall be substituted with the following, namely: ( d) principal officer means an employee of the portfolio manager who has been designated as such by the portfolio manager; ( ii) in regulation 6, in sub-regulation (2), clause (c) shall be substituted with the following, namely: ( c) the principal officer of the applicant has either 12 ( i) a professional qualification in finance, law, accountancy or business management from a university or an institution recognised by the Central Government or any State Government or a foreign university; or ( ii) an experience of at least ten years in related activities in the securities market including in a portfolio manager, stock broker or as a fund manager. These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Second Amendment) Regulations, 2006. c) after clause (c) the following clauses shall be inserted, namely: ( ca) portfolio means the total holdings of securities belonging to any person; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se PMS charges are paid based and calculated on purchases and sales of shares or even if these PMS charges are return based fees. These fees have a major component towards advisory charges being highly skilled and specialized knowledge and expertise based services being managerial and consultancy services of experienced and qualified professionals acting as portfolio managers who render these specialized and skilled services on a continuous basis to investor client for fee in a highly volatile and complex securities market to maximize gains and to create wealth for the investors, whether these fee paid to portfolio managers are calculated based on purchases or sales of securities, or a return based fee etc. is not relevant and material but the fact of the matter is that these PMS charges are not paid towards cost of acquisition of the capital assets or for improvement of the capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of the capital asset and hence the same cannot be allowed as deduction u/s. 48 of the Act from the full value of consideration received or accruing to the assessee as a result of the transfer of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d wholly and exclusively in connection with sale of shares and securities. On the other hand, the basis on which the said fees was paid by the assessee show that it had no direct nexus with the purchase and sale of shares and as rightly contended by the Ld. DR, the said fees was payable by the assessee going by the basis thereof even without there being any purchase or sale of shares in a particular period. As a matter of fact, when the ld. CIT(A) required the assessee to allocate the fees paid for PMS in relation to purchase and sale of shares as well as in relation to the shares held as investment on the last date of the previous year, the assessee could not furnish such details nor could he give any definite basis on which such allocation was possible. Having regard to all these facts of the case, we are of the view that the fees paid by the assessee for PMS was not inextricably linked with the particular instance of purchase and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with such sale or the cost of acquisition/improvement of the shares and securities so as to be eligible for deduction in computing capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be considered as diversion of income by an overriding title. 16. In the case of Sitaldas Tirathdas (supra), it was held by the Hon'ble Supreme Court that the true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, are there in every case, but it is the nature of the obligation which is the decisive fact. Explaining, further, it was observed by the Hon'ble Supreme Court that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches to the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was held by the Hon'ble Supreme Court that it is the first kind of payment which can truly be excluded and not the second. The second payment is merely an obligation to pay another a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (supra), after perusing the judgment very carefully we find that in that decision the decision of co-ordinate Bench of Mumbai Tribunal in the case of Devendra Motilal Kothari (supra) was distinguished mainly on the basis of decision of Hon'ble Bombay High Court in the case of Smt. Shakuntala Kantilal (supra). The Pune Bench referred to various paras of Hon'ble Bombay High Court's decision in para- 22 and ultimately concluded in para-23 that what was required was that the claim should be bona fide and claim for such genuine expenditure has to be allowed so long as incurring of the expenditure is a matter of fact and necessity. However, as pointed out by the Ld. DR this decision was specifically over ruled by the Hon'ble Bombay High Court in the case of Roshanbabu Mohd. Hussein Merchant (supra) and at placitum 18 it has been observed as under: As regards the decisions of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312] and the decision of the Kerala High Court in the case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802 which are strongly relied upon by the counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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