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Facts
The Revenue appealed against the CIT(A)'s order deleting an addition of ₹5.71 crores related to the disallowance of Portfolio Management Services (PMS) fees claimed by the assessee, an NBFC, as deductible expenses. The Tribunal condoned a 101-day delay in the Revenue's appeal filing. The assessee also invoked Rule 27 of ITAT Rules to defend the CIT(A)'s order on grounds that were initially decided against it.
Held
The Tribunal affirmed the assessee's right to support the CIT(A)'s favorable order under Rule 27, even on grounds previously decided against it. It held that the PMS expenses were genuine and exclusively incurred for the business of the assessee, an NBFC engaged in investment activities. Therefore, these expenses are allowable as business expenditure under Section 37 of the Income Tax Act.
Key Issues
Whether Portfolio Management Services (PMS) fees are deductible as an expense either in computing capital gains under Section 48 or as a business expenditure under Section 37 of the Income Tax Act for an NBFC, and whether the assessee can invoke Rule 27 of ITAT Rules to support the CIT(A)'s order on grounds decided against it.
Sections Cited
48, Rule 27, 37
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Income Tax Appellate Tribunal, “D” BENCH, KOLKATA
This is an appeal preferred by the Revenue against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 28.06.2024 for the AY 2022-23.
At the outset, we observe from the appeal folder that there is a delay of 101 days in filing the appeal by the Revenue for which the condonation petition was moved stating the reasons for delay in filing the appeal. After perusing the contents of the condonation petition filed by the Revenue, we observe that the delay is attributable to the time taken in obtaining various administrative approvals in the
The revenue has challenged the appellate order passed by the ld. CIT (A), wherein the ld. CIT (A) deleted the addition of ₹5,71,09,594/- on account of disallowance of PMS fees in computing the capital gain by ignoring the Provisions of Section 48 of the Act 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.
The assessee has also filed an application under Rule 27 of ITAT Rules, challenging the dismissal of ground no.1 by ld. CIT (A) while finally the ld. CIT (A) deleted the addition made by the AO by holding, the PMS expenses to be genuine and are allowable while computing capital gain.
After hearing the rival contentions and perusing the materials available on record, we find that the ground no.1 raised by the assessee before the ld. CIT (A) challenging the assessing of the total income of ₹85,90,28,764/- against the return income of ₹80,19,19,170/- is without jurisdiction, erroneous and bad in law. The assessee has not filed any appeal or cross objection against the dismissal of the said ground, however, raised the issue under Rule 27 of the ITAT Rules. For the sake of ready reference, the said rule is reproduced as under for ready reference:-
In our opinion, the assessee is within its legitimate and lawful rights to challenge the dismissal of the ground by way of application under Rule 27 of the ITAT Rules and is entitled to defend the order of ld. CIT (A) on all grounds including grounds which have been decided against it. The case of the assessee is squarely covered by the decision of Hon'ble Delhi High Court in the case of Sanjay Sawhney vs. Principal Commissioner of Income-tax [2020] 116 taxmann.com 701 (Delhi)/[2020] 273 Taxman 332 (Delhi)[18-05-2020], wherein the Hon'ble Court has held as under:-
“26. The upshot of the above discussion is that Rule 27 embodies a fundamental principal that a Respondent who may not have been aggrieved by the final order of the Lower Authority or the Court, and therefore, has not filed an appeal against the same, is entitled to defend such an order before the Appellate forum on all grounds, including the ground which has been held against him by the Lower Authority, though the final order is in its favour. In the instant case, the Assessee was not an aggrieved party, as he had succeeded before the CIT (A) in the ultimate analysis. Not having filed a cross objection, even when the appeal was preferred by the Revenue, it does not mean that an inference can be drawn that the Respondent- assessee had accepted the findings in part of the final order, that was decided against him. Therefore, when the Revenue filed an appeal before the ITAT, the Appellant herein (Respondent before the Tribunal) was entitled under law to defend the same and support the order in appeal on any of the grounds decided against it. The Respondent-assessee had taken the ground of maintainability before Commissioner (Appeals) and, therefore, in the appeal filed by “The object clause of MoA, Clause III(A)(3) at page 66 of P/B II reads as under: "To act as an investment and to carry on business of leasing and hire purchase, investment in shares and securities sick-industries Rehabilitation, Bridge- financing, Bill
Even in order to examine whether a expenditure is wholly and exclusively incurred for the purpose of business , the same has to view from angle of commercial expediency. The commercial expediency refers to those transactions /expenditures which are not required to be incurred under any provisions of the Law but refers to such expenditures which a prudent businessman incur for the purpose
Even the ld. CIT (A) has treated this PMS expenses to be genuine and bonafide and noted that these fund managers are regulated authorized entities by the SEBI to render the specialized services. The case of the assessee is squarely covered by the decision of the co- ordinate bench in the case of Mafatlal Holdings Ltd. Vs. Additional commissioner of income taxITA No. 2935/Mum/2002(2004) 85 TTJ 0821dated 23.04.2003, wherein the assessee company was engaged in the business of financing and investment and during the year it borrowed money for its business and claimed the deduction of interest on deposits u/s 36(1)(iii) of the Act. The ld. AO noted that the assessee has not given out any new finances during the accounting year relevant to assessment year under consideration, however the company increased its investment as compared to earlier assessment years and according to the ld. AO the entire funds available with the company have been mainly invested in the shares of the group companies and group partnership firms only. The ld. AO referred to the profit and loss account of the assessee and stated that the assessee was having income from dividend and long term investments which has been taxed as income from other sources and profit on sale
“18. The various Court cases relied upon by the learned Departmental Representative are not relevant to the facts of the present case. In the case of Oriental Investments Co. Ltd. (supra), the Hon’ble apex Court held that the mere fact that the company has within its objects the dealing in the business of investment in shares, does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved, it may be relevant for the purpose of determining the nature of the activities of the company. In the present case, the assessee-company actually carried out business activity during the year under consideration, which can be evidenced from the balance sheet for the financial year ending on 31st March, 1998. It could be observed from the balance sheet that there were various business transactions carried on by the assessee-company during the financial year of the nature of selling its investments, utilisation of the opening cash and bank balances, procuring unsecured loans during the financial year and utilisation of the said funds for its business purposes. Thus, the assessee-company had carried on the activities of all the ingredients of investment and finance company. Thus, the assessee-company was not only having its objects in dealing with the investment shares but there were other circumstances as stated above which proved undoubtedly that the assessee-company was an investment company. Therefore, the above Supreme Court decision has moreover supported the case of the assessee-company that the company was actually dealing in the business of investment in shares. In the case of Challapalli Sugars Ltd. (supra), the Hon’ble Supreme Court laid down that, if the interest paid on the amount borrowed for acquiring and installing machinery and plant for a period prior to commencement of production, the same would actually form part of the actual cost of machinery and plant. In the present case as we have discussed above in detail, the assessee-company carried on the business as a investment company during the year under consideration. The assessee-company had carried on the activities of the nature of purchase and sale of shares, had earned dividend income and had also incurred various business expenditure like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., which have also been allowed by the AO. Therefore, the interest expenditure incurred by the assessee is also allowable under the provisions of s. 36(1)(iii) as the assessee-company was in fact carrying on the business activities during the year under consideration. In the case of Ace Investments (P) Ltd. (supra), the Madras High Court has held "that the mere presence of the objects clause would not be sufficient to hold that the assessee was carrying on moneylending business. It
“10. Now so far as Question [B] is concerned, it appears that the Assessing Officer made disallowance of expenditure of Rs. 24,37,500/= incurred towards Consultancy charges. The Assessing Officer made disallowance under Section 37 of the Act, treating the same as capital expenditure. However on appeal, the learned CIT [A] deleted the disallowance made by the Assessing Officer by observed that the expenditure incurred by the assessee towards Consultancy charges was purely revenue in nature and therefore was allowable expenditure. The aforesaid finding and observation has been confirmed by the learned Tribunal by making observations in par-42, as under :— "42. We have duly considered rival contentions and gone through the record carefully. No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the investment, then how the assessee will get this set off. Therefore, the learned CIT [A] has rightly observed that the expenses were not incurred towards purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the learned CIT [A]. This ground of appeal is rejected."
11. Considering the aforesaid facts and circumstances of the case when the assessee incurred expenses towards consultancy charges in order to make investment, the Assessing Officer was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure, disallowable under Section 37 of the Act. Under the circumstances, the learned Tribunal has rightly deleted the disallowance of Rs. 24,37,500/= incurred by the assessee towards consultancy charges. We are in complete agreement with the view taken by the learned Tribunal.”
Considering the facts of the case of the above decision, 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
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 02.04.2025.