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Income Tax Appellate Tribunal, “B”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI MAHAVIR SINGH, JM
O R D E R PER R.C.SHARMA (A.M): These are the appeals filed by the assessee against the order of CIT(A)-Mumbai, for the assessment years 2006-07 to 2008-09, in the matter of order passed u/s.143(3) r.w.s.153A of the Act.
Common grievance of the assessee in all the years pertains to disallowance of claim of management fees while computing short term capital gain u/s.48 of the I.T.Act.
Rival contentions have been heard and record perused. Facts in brief are that assessee is an individual, shown income under the head short term capital gain. While computing the same assessee has claimed 2 management fees u/s.48 paid to portfolio manager. The AO held that the said amount debited is not an allowable expenditure u/s.48 of the IT Act for the following reasons :- (i) The assessee has paid the said expenditure for portfolio management. ii) The expenditure is not incurred as a result of the transfer of the capital asset. (iii) Nor the same has been expended as the cost of acquisition of the asset and the cost of any improvement.
By the impugned order, CIT(A) confirmed the disallowance by observing as under :- “1.14 As per provisions of section 55, cost of improvement and cost of acquisition has been defined for the purpose of section 48 and 49. The appellant has acquired capital asset in the form of equity shares or shares allotted to the shareholder. The cost of capital asset being share is the cost of purchase of shares. 1.15 As per provisions of section 48 with reference to mode of computation of capital gain, the only two type of expenditure are allowable as deduction. The relevant portion of section 48 is reproduced as under:- Mode of computation 48. "The income chargeable under the head "Capital gains" shall be computed, by deduction 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 asset and the cost of any improvement thereto" 1.16 The portfolio management fees is not expenditure incurred wholly and exclusively in connection with transfer of the asset. It is a composite fees of the services rendered by the portfolio management manager, which includes fixed fees of 10% of the corpus employed and variable fees of 25% beyond the 10% absolute return from corpus employed. However, total fees i.e. fixed fees and variable fees shall be restricted to 15% of the corpus employed. This fees include transaction fees, brokerage charges, demat fees, safe custody charges, statutory levies such as service tax and such other expenses incurred in respect of the investments 3 made under this agreement with fund managers. Thus, negligible part of this fees is attributable to expenditure for transfer of the share which is a brokerage, may 0.25% and stamp duty paid on transfer. No other fees charged. by the portfolio manager is related to the expenditure incurred wholly and exclusively in connection with transfer. 1.17 The appellant has further claimed the portfolio management fees as improvement to cost of the asset i.e. the shares purchased under the portfolio management schemes. This contention of the appellant is also not correct as the Portfolio Managers cannot make any improvement to the cost of the share by this scheme. It is only a strategy to sell asset at the appropriate time to fetch maximum gain related to Portfolio Management system. Thus fees charged for service rendered by the Fund Manager to get maximum gain therefore the same cannot be claimed as deduction under section 48 of the Income Tax Act as cost of improvement of the capital asset. It is pertinent to mention here that neither the appellant has incurred any expenditure in terms of interest on borrowed capital invested in corpus of the fund nor any specific expenditure incurred as brokerage paid to the brokers for sale of the shares. In view of this fact, the Assessing Officer is justified in not allowing deduction of portfolio management fees under section 48 of the Income Tax Act to the appellant. The case law relied upon by the appellant are distinguishable on facts and not applicable in the case of the appellant as none of the case law related to the allowability of portfolio management fees as deduction under section 48 of the Income Tax Act against income under the head capital gain. In view of this fact, ground of appeal
No. 1 and 2 of the appellant are not allowed.”
5. On the similar reasoning assessee’s claim of management fees was declined in all the three years under consideration, against which assessee is in further appeals before us. It was argued by ld. AR that the amount paid for services rendered in respect of purchase and sale of an asset is eligible for deduction u/s. 48 of the Act and it is immaterial as to who renders the services. An assessee may purchase and sale an asset like shares either directly or through an appointed agent and can claim deduction u/s. 48 of the Act for charges paid for purchase and sale of an asset. It was further submitted that the services rendered by Portfolio Managers for purchase and sale of shares are identical to, and 4 improvised services than the services rendered by a share broker. The share broker merely purchases and sales shares whereas under PMS, the Portfolio Managers also use their expertise in identifying scripts and crucial timing of undertaking transactions of those scripts thereby enhancing the gain. Hence, the PMS charges paid to portfolio managers are eligible for deduction u/s. 48 of the Act.
6. Our attention was invited to portfolio management agreements with various entities pursuant thereto the assessee was under obligation to pay the portfolio managers fees which was broadly categorised in following three segments. a. Upfront one-time fee based on the amount invested. b. Periodical fees based on the amount invested/net asset value (NAV) of the fund invested c. Fees based on the percentage of profit realised above the benchmark prescribed. In view of the above, ld. AR contended that assessee had entered into contracts with the portfolios managers and subsequently the transactions of purchase and sale of shares were undertaken by portfolio managers pursuant to these agreements. This itself clearly establishes that the appellant was under obligation to pay to the portfolio managers for the transactions undertaken pursuant to these contracts. In other words, the transactions of sale and purchase of shares were subject to prior obligation to pay the portfolio managers, their fees falling into the aforesaid 3 categories. It is submitted that such obligation to pay for acquisition as well as disposal of the shares constitute 'cost of acquisition' 5 of the asset i.e. shares. Therefore, the PMC charges paid also form part of cost of acquisition and are eligible for deduction u/s. 48 of the Act.
As per ld. AR the PMS charges are very akin to the interest paid on the amounts borrowed for the acquisition of an asset and eligible for deduction u/s. 48 of the Act. The transaction for purchase of an asset and transaction to borrow interest bearing funds are distinct transactions. The obligation to pay interest is undertaken at the time of borrowing although the interest accrues and paid subsequent to borrowing. However, the interest paid forms part of cost of acquisition of an asset if the funds borrowed are utilised for acquisition of an asset. Similar situation arises under PMS wherein an obligation to pay PMS charges is undertaken prior to rendering services to acquire and sale the shares although the actual quantification and payment of PMS charges occurs subsequent to execution of such transactions. It is well settled in law that although interest is paid subsequent to purchase of an asset, such interest constitutes 'cost of acquisition' of an asset and the same is eligible for deduction u/s. 48 of the Act. In the like manner, the PMS charges also constitutes 'cost of purchase' and eligible for deduction u/s. 48 of the Act.
Ld. AR further placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT v. Mithlesh Kumari [92 ITR 9 (Del)] the issue before the Hon'ble High Court was that whether the interest and ground rent paid by the assessee constituted the actual cost of plot of land for the purpose of determining the capital gain. In that case, the assessee had borrowed funds from her mother-in-law to pay the price of the land and 6 paid interest thereon. The assessee also incurred other expenditure related to the said plot of land namely ground rent, penalty paid to the Improvement Trust and brokerage on the sale of land. The assessee claimed deduction for these expenses while computing capital gains arising out of sale of plot of land to mother-in-law. The income tax officer allowed expenditure only on account of brokerage and Appellate Assistant Commissioner upheld the view taken by the income tax officer. However, the Tribunal allowed the entire expenditure claimed by the assessee and the revenue filed reference before the High Court challenging the order of the Tribunal. The counsel appearing for the revenue argued that the actual cost of the capital asset to the assessee is the actual cost of the assessee as on the date of acquisition of the capital asset and it did not include the expenditure which assessee may have incurred subsequently except that expenditure specifically mentioned in Section 12B(2)(ii) of I.T.Act, 1922. It was also argued that interest paid by the assessee did not come under the category of expenditure incurred for making any addition or alteration to the capital asset and hence cannot be included in the actual cost of the capital asset. However, the High Court rejected the contentions of the revenue and held that the assessee was entitled to claim deduction on account of interest paid as it constituted part of the actual cost of the plot and that the assessee was not entitled for deduction for the ground rent paid by the assessee.
Following para of the Hon’ble Delhi High Court judgment was emphasised wherein Hon’ble Delhi High Court followed the ratio of law "We are in respectful agreement with the observations of the Calcutta and the Bombay High Courts in the decisions referred to above. In the present case, we find that the assessee in order to purchase the land had not only to borrow the amount of Rs. 95,000 which was the consideration for the purchase of the land, but also had to pay interest of Rs.16,878 on the amount borrowed by her. The amount of Rs.95, 000 plus the interest paid by the assessee constitutes the actual cost to the assessee of the land The fact that the amount of Rs. 95,000 was paid by the assessee to the vendor and the amount of interest of Rs. 16,878 was paid to a different person namely, her mother-in-law, does not make any difference so far as the assessee is concerned in respect of the actual cost of the land to her. It will not also make any difference whether the interest was paid on the date of the purchase or whether it is paid subsequently. To exclude the interest amount from the actual cost of the asset would lead to anomalous results. Supposing she had purchased the land for Rs.1,00,000, by raising a loan of that amount and had paid interest of Rs.20, 000 on the said loan and had sold land for Rs.1,20,000. It would be unreasonable to hold under such circumstances by excluding the interest amount from the actual cost of the land that she had made a capital gain of Rs.20,000 when, as a matter of fact, she had not made any profit at all by the transaction. Applying the said observations of the Calcutta and the Bombay High Courts to the present case, we hold that the Tribunal was right in adding the interest amount of Rs. 16,878 towards the actual cost of the land.
Reliance was also placed by ld. AR on the decision of Hon’ble Andhra Pradesh High Court in the case of ACIT v. K. S. Gupta [119 ITR 372 (AP)], identical issue of ascertaining 'actual cost' for the purpose of determining the capital gain was the subject matter of the reference made to the High Court. In that case, the assessee paid Rs.9,138 /- for purchase of 2 plots of land and paid interest of Rs.11,344/- on the amounts borrowed by the assessee for purchase of these plots. The said interest was paid for period 1.1.1957 to 11.8.1966. The assessee sold these plots for Rs. 32,100 and claimed deduction of Rs. 20,434 (i.e. 9138 8 + 11,344) while computing capital gains on sale of plots. The income tax officer rejected the deduction claimed on account of interest for the reason that such interest was allowed as revenue expenditure. The AAC noticed that no such interest was allowed and hence, allowed deduction of interest by restricting it to the extent of annual value of the property. However, on further appeal, the Tribunal allowed the entire interest expenditure and the Department filed a reference before the High Court. While disposing the reference, the Hon'ble High Court took into consideration the meaning ascribed to the expression 'actual cost' by the Hon'ble Supreme Court in the case of Challappalli Sugar Ltd.
10. In view of the above, it was submitted that for the purpose of determining the gain arising on transfer of an asset, the cost of an asset has to be determined on the basis of well-established commercial principles and only the 'real income' so commercially determined can be subjected to tax.
Reliance was also placed on the decision of Hon’ble Madras High Court in the case of Trishul Investment Ltd. 305 ITR 434 in support of the proposition that deduction on account of interest liability of borrowings made to acquire the shares is to be considered. Ld. AR further submitted that SLP filed against the order of Madras High Court was dismissed by Hon’ble Supreme Court which was reported at 306 ITR (St.) 4.
Reliance was also placed by ld. AR on some of the decisions in favour of the assessee which are as follows :- a. DCIT v. KRA Holding & Trading P. Ltd. [ITA no. 356 and 240/PN/2011 for AY. 2007 -08 order dated 25.07.2012] (after 9 taking into consideration decision of the Tribunal, Mumbai Bench, in the case of Homi K. Bhabha v ITO in IT ANo. 3287/Mum/2009 order dated 28.09.2011). The Hon'ble Tribunal followed their order in the assessee's own case for AY.2004-05 and also noted that the Department has not preferred any appeal against that order on this issue. b. KRA Holding & Trading P. Ltd. v DCIT [ITA no. 703/PN/2012 for AY 2008-09 order dated 19.09.2013] (after taking into consideration decision of the Tribunal, Mumbai Bench, in the case of Homi K. Bhabha v ITO in ITA No. 3287/Mum/2009 order dated 28.09.2011 c. ARA Trading & Investments P. Ltd. v ACIT [ITA No.94 and 337/PN/2012 for AY. 2007 -08 (and others) order dated 19.09.2013] d. Serum Institute of India Ltd. v ACIT [ITA no. 1576 and 1617/PN/2012 for AY. 2007-08 order dated 18.02.2015] e. Amrit Diamond Trade Centre P. Ltd. v ACIT [ITA no. 2642/Mum/2013 for AY 2009-10 order dated 15-1-2016.
13. Ld. AR fairly conceded that some of the decisions are also against the assessee which are as under :- a. Devendra Motilal Kothari v DCIT [136 TTJ 188 (Mum)] b. Homi K. Bhabha v ITO [IT ANo. 3287/Mum/2009 for AY. 2006- 07 order dated 28.09.2011] c. Kushal N. Desai v ACIT [ITA no. 5160/Mum/2010 for AY. 2008- 09 order dated 25.01.2012. As per ld. AR the decisions against the appellant are distinguishable on facts and other reasons stated hereunder. Therefore, the same may not be followed by the Tribunal : a. The decisions of the High Courts cited by the appellant were not taken into consideration. b. The latest decision on the issue by the Tribunal, Mumbai Bench in the case of Amrit Diamond Trade Centre P. Ltd. v ACIT (supra) is in favour of the appellant. c. The assessees in those cases were unable to demonstrate/correlate or explain how the expenditure were 10 exclusively incurred wholly in connection with sale of shares and securities or that the expenditure incurred was forming part of cost of acquisition.
14. On the other hand, ld. CIT DR Shri N.P.Singh submitted that the assessee's claim has been disallowed as the same was not covered by the provisions of section 48 with regard to the computation of capital gains. In support of the orders of the AO and the CIT(A) the following judicial pronouncements were placed before us in support of the impugned disallowance: (1) Devendra Motilal Kothari vs. DCIT pronounced on 26/03/2010 reported in 13 Taxmann 15 (Mumbai) (2011) (2) Pradeep Kumar Harlalka vs. ACIT pronounced on 10/08/2011 47 SOT 204 (Mum) (2011) (3) Homi K. Bhabha vs. ITA pronounced on 28/09/2011 48 SOT 102 (Mum) (2011 ). It was submitted that the Tribunal in the above three cases after analyzing the issue and dealing with the various aspects of the issue u/s. 48 have sustained the disallowance as the portfolio management fees is not found to be 'only and exclusively' in connection with the transfer of shares u/s. 48 of the Act.
15. Ld. CIT DR also brought to our notice the case of the assessee's son namely Shri Kushal M. Desai wherein an identical disallowance was made and confirmed by the first appellate authority. In second appeal, the Tribunal 'A' Bench, Mumbai, in ITA No.5160/M/10 the judgment pronounced on 25/1/12, have confirmed the disallowance by relying on the judgment of Devendra Motilal Kothari (supra) and held that the claim of the assessee regarding payment of management fee and its deduction 11 u/s.48 while computing short term capital gain, is not an admissible deduction. It was vehemently argued by ld. DR that the decision relied on by the ld. AR in the case of K.S.Gupta(supra), Mithlesh Kumari (supra), Trishul Investment and Ms. Seema Harshit Savla, ITA No.6536/Mum/2010, dated 19-8-2015 are distinguishable on facts insofar as none of the judgments on the issue relating to computation of capital gain with respect to management fee u/s.48 of the Act. As per ld. CIT DR the decision in the case of K.S. Gupta is on the issue of interest paid on the monies borrowed for the purchase of land. The issue in the case of Trishul Investment pertains to the purchase of shares out of the borrowed funds and interest paid thereon. The judgment in the case of Mithlesh Kumari is on account of interest on money borrowed for the purchase of plot and ground rent and the decision in the case of KRA Holdings is on the issue of whether a particular receipt is a short term or long term capital gain.
16. With regard to decision of Hon’ble Delhi High Court as relied by ld. AR, it was contended by ld. DR that the decision of the Hon'ble Delhi High Court is on the issue whether profit on sale of shares is to be considered as business income or short term capital gain. The decision of the Hon'ble Tribunal in the case of Ms. Seema Harshit Savla, ITA No.6536/Mum/2010, in which the Hon'ble Tribunal has followed the decision of Radials International is on the issue of whether a particular receipt on sale of shares is short term capital gain or business income. Therefore, there is 12 no conflict between that judgment of the Tribunal and the earlier judgment of the Tribunal (supra) relied on by the Revenue.
We have considered rival contentions, carefully gone through the orders of the authorities below and also deliberated on the judicial pronouncements cited at bar by ld. AR and DR during the course of hearing before us as well as decision relied on by lower authorities while arriving at a decision that portfolio management fees is not deductible u/s.48 while computing capital gains. From the record we found that during all the years under consideration assessee has earned huge capital gains out of sale of shares. While computing capital gains assessee has claimed deduction for the portfolio management charges paid to various entities which was disallowed by the lower authorities on the plea that expenditure was not incurred as a result of transfer of capital asset nor the same has expended the cost of acquisition of the asset nor it amounts to cost of any improvement. The scope of services of portfolio managers have been discussed in great detail by coordinate bench in the case of Capt. Avinash Chander Batra, ITA No.7407/Mum/2011, dated 30- 3-2016, wherein the Tribunal has observed as under :- 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 provide‟s 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 13 Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from the SEBI in accordance with the regulations made under the SEBI Act,1992. The SEBI Act,1992 by virtue of provisions of Section 30 grants the power to SEBI to make regulations by notification consistent with the SEBI Act,1992 and the rules made there-under to carry out purposes of the Act which is primarily investor protection and to promote the development of, and to regulate the securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate the business of portfolio managers in India by promulgating „Securities and Exchange Board of India (Portfolio Managers) Regulation,1993‟ which were amended from time to time . Under clause 2(cb) of Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , the portfolio manager is defined as under: “(cb) “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;] “ Under Clause 14 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , it is stipulated as to contract which portfolio manager is required to enter with client and disclosures to be made as under:- “[14. Contract with clients and disclosures.─(1) (a) The portfolio manager shall, before taking up an assignment of management of funds or portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV. (b) The agreement between the portfolio manager and the client shall, inter alia, contain: (i) the investment objectives and the services to be provided; (ii) areas of 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; 14 (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 furnishing of the reports to the clients as per the provisions of these regulations; (xv) other terms of portfolio investment subject to these regulations.” The portfolio managers general responsibilities are defined in clause 15 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :- “15. General responsibilities of a Portfolio Manager.─(1) The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client. [(1A) The portfolio manager shall not accept from the client, funds or securities worth less than five lacs rupees.] (2) The portfolio manager shall act in a fiduciary capacity with regard to the client's funds. [(2A) The portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Scheduled Commercial Bank. Explanation.─For the purposes of this sub-regulation, the expression „Scheduled Commercial Bank‟ means any bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).] (3) The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934). (4) The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities. [(4A) The portfolio manager shall not borrow funds or securities on behalf of the client.] [(5) The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.] (6) The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately”. These Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 were amended from time to time and the relevant amendments so far concerning issue‟s under this appeal are reproduced below : “ These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 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 – (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; (cb) “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of 16 a portfolio of securities or the funds of the client, as the case may be;” The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with an objective of investor protection and promote and regulate securities market. The qualification and experience of the portfolio manager is also specified in the afore-stated regulations so that only professional, skilled, specialized and experienced persons are engaged in the activities of portfolio management . The roles and responsibilities of portfolio managers covers a vast spectrum of activities provided to clients for fee ranging from providing advises , or direct or undertake on behalf of client the management or administration of a portfolio of securities or funds of the client meaning thereby that the portfolio managers does not act merely as a stock-broker to buy and sell shares of the clients in execution of the instructions of the client‟s for a brokerage/commission , but portfolio manager renders a vast spectrum of activities which involves giving advises to clients and/or management and administration of securities or fund portfolio‟s of the client which is managed by experienced, specialized, skilled and qualified professionals who act as portfolio managers to render their expertise, skill and specialized knowledge to the investor‟s client for a fee with an objective to create wealth for the investor client‟s and maximizing gains for these investors client. The highly specialized and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in a highly volatile and complex securities market with an objective of wealth creation and maximizing gains for the investor‟s clients and are not rendering merely services connected with the transfer of shares nor are they connected with cost of acquisition or sale of shares even if these 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 17 received or accruing to the assessee as a result of the transfer of the capital asset being shares. Our above view is fortified by the decision of jurisdictional Mumbai- tribunal in the case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). The findings of the Mumbai- tribunal in the case of Devendra Motilal Kothari(supra) on identical issue are as under: “12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities chargeable to tax under the head "capital gains" and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allowed as deduction in computing such income or not. In this regard, it is observed that the charge of Income-tax is created by virtue of the provisions contained in section 4 according to which the Income-tax is charged for the relevant assessment year in accordance with and subject to the provisions of Income-tax Act in respect of the total income of the relevant previous year of every person. As per the scheme of the Act, income is broadly classified under five different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head 'capital gains' and section 48 in particular prescribes the mode of computation of capital gains. As provided in section 48, expenditure incurred wholly and exclusively in connection with transfer and the cost of acquisition of the asset and cost of any improvement thereto are deductible from the full value of the consideration received or accruing to the assessee as a result of transfer of the capital assets.
In the present case, the deduction on account of fees paid for PMS has been claimed by the assessee as deduction in computing capital gains arising from sale of shares and securities. He however has failed to explain as to how the said fees could be considered as cost of acquisition of the shares and securities or the cost of any improvement thereto. He has also failed to explain as to how the said fees could be treated as expenditure incurred 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 18 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 gains under section 48.
As regards the case laws cited by the Ld. Counsel for the assessee in support of the assessee's case on the point under consideration, it is observed that the facts involved therein were altogether different in as much as the relevant amounts claimed by the assessee as deduction in computing capital gains were found to be in the nature of expenditure/cost covered by section 48. For instance, in the case of Mathuradas Mangaldas Parekh (supra), payment of betterment charges made under town planning scheme had resulted in increase in potential value of land and the same therefore were held to be cost of improvement of the said land. Similarly, in the case of Chemmancherry Estates Co. ( supra), funds borrowed by the assessee were utilized for acquisition of land and the interest paid thereon thus was held to the forming part of the cost of acquisition of the land. In other cases also, the brokerage expenses incurred by the assessee were in respect of particular sale of capital assets and the same therefore were held to be deductable while computing capital gain being expenditure incurred wholly and exclusively in connection with such transfer/sale.
At the time of hearing before us, the Ld, Counsel for the assessee has raised an alternative contention in support of the assessee's claim for deduction on account of fees paid for PMS in computing the capital gains relying on the theory of real income and the rule of diversion of income by an overriding title. He has contended that the fees for PMS being contractual liability directly relatable to the capital gains, there was a diversion of income from capital gain by an overriding title to the extent of the amount of such fees and the same therefore was not the income belonging to the assessee which was chargeable to tax under the head "capital gains". In this regard, we may observe that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged by an overriding title, the same can be considered as diversion of income by an overriding title.
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 19 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 portion of one's own income which has been received and is since applied.
17. In the present case, the profit arising from the sale of shares was received by the assessee directly which constituted its income at the point when it reached or accrued to the assessee. The fee for PMS on the other hand was paid separately by the assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any merit.
As regards the contention of the Ld. Counsel for the assessee in support of assessee's claim for deduction on account of fees paid for PMS based on real income theory, we agree with the ld. DR that the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the Income-tax Act. In the case of CIT v. Udayan Chinubhai [1996] 222 ITR 456 / 88 Taxman 114 (SC) it was held by the Hon'ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory.
For the reasons given above, we find no merit in the arguments raised by the Ld. Counsel for the assessee in support of the assessee's case on the issue under consideration and rejecting the same, we hold that the fees paid by the assessee for PMS was not deductible in computing the capital gains as rightly held by the Assessing Officer The impugned order of the Ld. CIT(A) confirming the disallowance made by the Assessing Officer on this issue is therefore upheld dismissing this appeal filed by the Assessee.
In the result, the assessee's appeal is dismissed”
20 The assesseee has placed reliance on decision‟s of Pune benches of the Tribunal including in the case of KRA Holding and Trading Private Limited (supra) which is distinguished by the Mumbai Tribunal in the case of Pradeep Kumar Harlalka(supra ) as under:-
“13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding & Trading (P.) Ltd. (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 802which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the apex court referred to hereinabove.
Thus, without going into further details we would only like to observe that the decision in the case of Smt. Shakuntala Kantilal (supra) is no more a good law in view of the latest decision and therefore that decision cannot be relied for the proposition that necessity of expenditure would make the same allowable.”
Thus, Respectfully following the afore-stated decision‟s of the co- ordinate jurisdictional Benches of the Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of Rs.20,04,393/- paid to portfolio managers being management expenses incurred with respect to securities / funds of the assessee being managed by portfolio managers , being disallowed by the AO and confirmed by the CIT(A), are not allowable as deduction u/s 48 of the Act from the full value of consideration on sale of securities received or accruing to the assessee . Accordingly, we dismiss this appeal filed by the assessee. We order accordingly.
In the result, the appeal filed by the assessee in ITA N0. 7407/Mum/2011 for the assessment year 2008-09 is dismissed.