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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
These cross appeals, filed by the assessee and the Revenue, being respectively , are directed against the order dated 19-08-2011 passed by learned Commissioner of Income Tax (Appeals) – 6, Mumbai (hereinafter called “the CIT(A)” ), for the assessment year 2008-09.
First we shall take up the assessee’s appeal and the grounds of appeal raised by the assessee in the memo of appeal filed with the Tribunal read as under:-
“On the facts & in the circumstances of the case and in law the learned Assessing Officer has erred in confirming the disallowance of an amount of Rs. 20,04,393/- being Management Expenses incurred for earning Short term capital gain. Your appellant pray that the same be deleted.”
The Brief facts of the case are that the assessee is an individual and director in M/s Marine Container Services India Pvt. Ltd. It was observed by the A.O. that the assessee has disclosed short term capital gains of Rs. 1,99,003/-. The assessee has also claimed long term capital gains of Rs. 72,94,563/- as exempt income u/s 10(35) of the Income Tax Act, 1961(hereinafter called “the Act”) besides dividend income of Rs. 1,99,54,691/- and interest of Rs. 96,050/- received from relief bonds. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, it was observed by the learned assessing officer (hereinafter called “the AO”) from the details filed by the assessee that the assessee has earned gains of Rs.92,17,544/- arising out of PMS accounts held with various funds, out of which Rs. 23,56,127/- was earned from short term capital gains . The ITA 7407/Mum/11 & ITA 7439/M/11 3 A.O. further observed that assessee has , inter-alia, claimed to have incurred an expenditure of Rs. 22,64,272/- for earning the short term capital gains arising out of the PMS account and claimed the same as deduction from the net short term capital gains of Rs. 23,56,127/-. The A.O. disallowed the same as no expenditure is allowable for earning short term capital gain, vide assessment order dated 01-07-2010 passed u/s 143(3) of the Act.
Aggrieved by the orders dated 01-07-2010 passed by the A.O. u/s 143(3) of the Act, the assessee preferred an appeal before the CIT(A).
Before the CIT(A), the assessee submitted that the expenses are incurred on ‘Management Expenses’ paid to portfolio managers namely ICICI Prudential Asset Management Company Limited and Optimix ING and the A.O. disallowed the expenditure because as per the A.O. , the same is neither expended in connection with transfer of shares nor towards acquisition of such shares. The assessee submitted that the amount paid is only in respect of two activities of the assessee , as the portfolio manager merely buys shares on behalf of the assessee and then sells them on behalf of the assessee. Thus as per the assessee , the expenditure is therefore only related to buying and selling of shares and to no other activity whatsoever. The assessee relied upon the judgment of Hon’ble Bombay High Court in the case of CIT v. Shakuntala Kantilal (1991)190 ITR 56(Bom.) , Hon’ble Bombay High Court judgment in the case of CIT v. Abrar Alvi, (2001)247 ITR 312(Bom. HC) and also judgment of Hon’ble Kerala High Court in V A Vasumathi v. CIT (1980)123 ITR 94 (Kerala). The assessee submitted that the expenses incurred were mainly on portfolio management services paid to portfolio manager and the assessee was having PMS account with ICICI Prudential Asset Management Co. Ltd. and Optimix ING , which is incurred wholly and exclusively in connection with such transfer of shares being purchase and sale of shares , as provided u/s 48(i) of the Act and the same should be allowed as expenses. The assessee ITA 7407/Mum/11 & ITA 7439/M/11 4 submitted that the portfolio management expenses were incurred for purchase and sale of shares which give rise of short term capital gains, long term capital gains and dividend. The detailed chart of expenses attributable to short term capital gains and long term capital gains duly bifurcated were submitted before the authorities below . The CIT(A) considered that the total expenses were to the tune of Rs. 22,64,272/- and the ratio of sales to total of purchase and sale is 45% and the assessee has bifurcated PMS expenses on the basis of short term capital gains and long term capital gains and then in the ratio of sales which were 45% of purchases and the ratio was applied to sale of shares leading to earning of short term capital gain to arrive at PMS expenses attributable there-to , which PMS expenditure comes to Rs. 5,75,136/- relatable to short term capital gains and 45% thereof being sale to purchase ratio , in relation to short term capital gains on sale of shares , PMS expenses comes to Rs. 2,59,879/- which were was allowed by the CIT(A) and rest of PMS expenses were disallowed by the CIT(A) whereby the CIT(A) held that the management expenses incurred for sale of shares leading to earning of short term capital gain are deductible from the full value of consideration as expenditure incurred wholly and exclusively in connection with such transfer as provided in section 48(i) of the Act. The CIT(A) thus allowed the expenses to the extent of Rs. 2,59,879/- and disallowance of the rest of the amount i.e. Rs. 20,04,393/- was confirmed , based upon the ratio of sales to total purchase and sale being 45% , and the same being applied to sale of shares leading to earning of short term capital gains , vide orders dated 19-08-2011.
6.Aggrieved by the orders dated 19-08-2011 of the CIT(A), the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the assessee is a salaried employee and has earned short term capital gain and long term ITA 7407/Mum/11 & ITA 7439/M/11 5 capital gain on sale of shares . It is submitted that the assessee had maintained portfolio managements services account (PMS) with portfolio managers namely ICICI Prudential Asset Management Company Limited and Optimix ING and had paid an amount of Rs. 22.64 lacs as portfolio management expenses for purchase and sale of shares. The CIT(A) has partly allowed PMS expenses of Rs. 2,59,879/- based upon the ratio of sales to purchases being 45% on the sale of shares whereby short term capital gain has been earned and balance amount was disallowed. The ld. Counsel submitted that the assessee has not incurred any PMS charges on long term capital gain earned by the assessee. The ld. Counsel submitted that PMS charges @ 1% on purchase and 1% on sales of shares have been paid and the same should be allowed as these are expenses incurred wholly and exclusively in connection with transfer of shares which is allowable u/s 48(i) of the Act. The ld. CIT(A) erred in not allowing the same. The ld. Counsel submitted that the amount of expenditure incurred wholly and exclusively in connection with such transfer as is contained in Section 48(i) of the Act is wider connotation than the expression “ for the transfer” and hence management fee incurred in connection with the Purchase and sale of shares is deductible expenses in connection with such transfer. The ld counsel relied upon the judgment of Hon’ble Supreme Court in the case of Sasoon J David & Co. Private Limited v. CIT (1979)118 ITR 261(SC) . The ld. Counsel also relied upon the decision of Pune Bench of the Tribunal in the case of ARA Tarding and Investments Private Limited in , KRA Holding & Trading Private Limited in ITA No. 356/Pn/2011, Asha Parekh in ITA no 630/PN/2011 and Prakash H Parakh in ITA No. 554/Pn/2011 and contended that these PMS charges should be allowed as these are incurred in connection with buying and selling of shares on which capital gains have arisen and prayed that the same should be allowed. The assessee counsel also submitted where two views are possible then the view which is favourable to the assessee has to be followed relying on judgment of CIT v. Vegetable Products ITA 7407/Mum/11 & ITA 7439/M/11 6 (1973)88 ITR 192(SC). The assessee also relied upon judgment’s of Hon’ble Bombay High Court in the case of CIT v. Shakuntala Kantilal (1991) 190 ITR 56(Bom.HC) and CIT v. Abrar Ali (2001)247 ITR 312(Bom HC.) and judgment of Hon’ble Kerala High Court in the case of V A Vasumathi v. CIT (2001) 123 ITR 94(Ker.HC). The assessee counsel also relied upon amended clause 3 vide SEBI (Portfolio Managers) (Amendment) Rules, 2002 whereby clause 3(a) provides that 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, the assessee’s counsel submitted that portfolio manager only buys and sell shares on behalf of the assessee and these expenses are only related to activity of buying and selling shares and no other activity whatsoever.
The ld. D.R., on the other hand, relied upon the orders of authorities below.
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 Rs.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 Rs.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 Rs.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 Rs.20,04,393/- vide this appeal .
ITA 7407/Mum/11 & ITA 7439/M/11 7 It is an un-disputed 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 assessee with ICICI Prudential Asset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of Rs.22,64,272/- has been paid by the assessee to the portfolio managers , the income arising thereof from sale of shares is chargeable to tax under the head ‘Capital Gains’ , for which the income is to be assessed under Chapter IV-E of the Act as per the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under :
“Section 48 [Mode of computation. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting 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: ********** **********”
Thus, as could be observed from provisions of Section 48 of the Act , for computing capital gains, it is required to deduct from full value of consideration, the expenditure incurred wholly and exclusively in connection ITA 7407/Mum/11 & ITA 7439/M/11 8 with such transfer and also the cost of acquisition of the capital asset and cost of any improvement thereto.
With the above background, we have to see whether the portfolio management charges of Rs. 22,64,272/- paid by the assessee can be allowed as deduction from the full value of consideration received or accruing to the assesse as a result of transfer of the capital asset being shares , provided the said PMS charges are either expenditure incurred wholly and exclusively in connection with the transfer of shares or PMS charges is a cost of acquisition or the cost of any improvement thereto of the capital asset being shares as per mandate of Section 48 of the Act. The assessee to support his contentions has relied on the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Rules, 2002 to contend that these PMS charges are allowable expenditure as the portfolio managers are allowed to be paid fee on ‘return based fee’ meaning thereby that it is an expenditure incurred wholly and exclusively in connection with the transfer of shares as these PMS charges are connected with sale and purchase of shares .
Before we proceed further 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 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 ITA 7407/Mum/11 & ITA 7439/M/11 9 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 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;] “
ITA 7407/Mum/11 & ITA 7439/M/11 10 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; ITA 7407/Mum/11 & ITA 7439/M/11 11
(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 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 :-
ITA 7407/Mum/11 & ITA 7439/M/11 12
“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.] ITA 7407/Mum/11 & ITA 7439/M/11 13
[(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 – ITA 7407/Mum/11 & ITA 7439/M/11 14
(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 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 ITA 7407/Mum/11 & ITA 7439/M/11 15 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 ITA 7407/Mum/11 & ITA 7439/M/11 16 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 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 ITA 7407/Mum/11 & ITA 7439/M/11 17 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 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 ITA 7407/Mum/11 & ITA 7439/M/11 18
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.
14. 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 ITA 7407/Mum/11 & ITA 7439/M/11 19
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 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 ITA 7407/Mum/11 & ITA 7439/M/11 20 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.
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 ITA 7407/Mum/11 & ITA 7439/M/11 21
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. 20. In the result, the assessee's appeal is dismissed”
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 ITA 7407/Mum/11 & ITA 7439/M/11 22 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. the for assessment year 2008-09 (Revenue’s appeal)
This appeal filed by the Revenue is disposed of because the tax effect in the appeal is less than Rs. 10 lacs as per the latest CBDT Circular No. ITA 7407/Mum/11 & ITA 7439/M/11 23 21/2015, F. No. 279/Misc.142/2007-ITJ (Pt) dated 10th December, 2015 issued by Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India.
The ld. D.R. submitted that tax effect involved in this appeal is less than Rs. 10 lacs and the CBDT Circular No. 21/2015 is applicable to this appeal and the appeal is not maintainable/not pressed in terms of CBDT circular no 21/2015 dated 10/12/2015. The ld. DR submitted that as per the latest CBDT Circular No. 21/2015, F. No. 279/Misc.142/2007-ITJ (Pt) dated 10th December, 2015 issued by Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, no appeal shall be filed by the Revenue in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3 of the circular.
Para 3 of the Circular No. 21/2015
S No. Appeals in Income tax Monetary Limit matters (in Rs) 1 Before Appellate Tribunal 10,00,000/- 2 Before High Court 20,00,000/- 3 Before Supreme Court 25,00,000/- In the said circular vide para 10, it is stipulated that this instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits in may be withdrawn/not pressed.
13. Keeping in view the CBDT Circular No. 21/2015 dated 10th December, 2015 which is applicable from retrospective effect and is also applicable to pending appeals and also in view of ld. DR stating before us that this appeal ITA 7407/Mum/11 & ITA 7439/M/11 24 is now not maintainable/not pressed in view of the above CBDT Circular, we hold that this appeal filed by the Revenue which is covered by this order involving tax effect less than Rs. 10 lacs is not maintainable and is dismissed being not pressed. However, the Revenue is at liberty to file an application for recall of this appeal in accordance with law, if at any stage it is found that tax effect is more than Rs 10 lacs or the Revenue wants to agitate the matter in accordance with the provisions/clauses as contained in the afore-stated circular. We order accordingly.
In the result, the appeals filed by the assessee as well as the Revenue are dismissed. Order pronounced in the open court on 30th March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 30-03-2016 को क� गई ।