Portfolio Management Fees is allowable expenditure

[CA DEV KUMAR KOTHARI]

JOY BEAUTY CARE (P) LTD. VERSUS DCIT CIRCLE -10, KOLKATA

I.T.A No. 856/Kol/2017  Dated: - 05 September 2018 2018 (9) TMI 422 - ITAT KOLKATA

Judgment referred and followed by Tribunal:

1. KRA Holding & Trading (P.) Ltd. Versus Deputy Commissioner of Income-tax, Range 11(1), Pune - 2011 (5) TMI 498 - ITAT PUNE

THE COMMISSIONER OF INCOME TAX-I, PUNE VERSUS KRA HOLDING & TRADING PVT. LTD. INCOME TAX APPEAL NO.3482 OF 2010

Dated: - 19 July 2011 2011 (7) TMI 1231 - BOMBAY HIGH COURT

Other judgments:

Some of judgments or relevant portion on issue of allow ability of PMS fees in the following cases were also placed in paper book filed by Author:

1.     In case of HERO MOTOCORP LIMITED, Delhi Bench of ITAT allowed PMS against capital gains. There seems no appeal of revenue before Delhi High Court, as per web-search.

2.     In case of SHRI NADIR A. MODI Bombay  Bench of ITAT, following rule of interpretation in favour of assesse by applying CIT Vs. Vegetable Products (1973 (1) TMI 1 - SUPREME Court)] allowed PMS fees.

3.     In case of M/S. AMRIT DIAMOND TRADE CENTRE PVT. LTD , Bombay Bench of ITAT allowed PMS fees.

4.     In case of BHAVIN A SHAH- Ahmedabad Bench allowed PMS fees against income from other sources.

5.     In the case of SERUM INSTITUTE OF INDIA LTD. ITAT Pune allowed deduction under head capital gains. There seems no appeal of revenue.

Judgments in above cases are found on this website.

Case before Kolkata ITAT in case of Joy Beauty Care P. Ltd (Supra.)

Portfolio Management Services charges (PMS) :

In this case Ld. CIT(A) held gains from investment managed by portfolio managers as capital gains. Order on this aspect was not challenged by Revenue.

 Ld. CIT (A) did not allow portfolio management fees against capital gains. Therefore, assesse preferred appeal and folloing grounds were raised in grounds of appeal on this issue:

“ For that, in view of facts and circumstances, learned CIT(A) was wrong in confirming disallowance of ₹ 18,93,788/- incurred on account of Portfolio Management Fees which is in nature of diversion at source before accrual  and is also allowable as deduction from consideration accruing on transfer of capital assets  as well as allowable contractual expenditure for managing the portfolio, including normal activities of acquiring, holding, managing and transferring securities from which income is derived.”

Submissions were made on the following lines:

1. Major functions of Portfolio Managers include acquisition of investment and transfer of the same at opportune time and to maintain records and provide management information reports from time to time.

2. It is not possible to accurately calculate amount spent by way of PMS fees which is for acquiring and for  transferring investments because there is running activity involving some selling and acquisition on regular basis.

3. Therefore, Portfolio Management Fees was claimed by assesse  in totality. Lower authorities have also not made any attempt to ascertain amount towards cost of acquisition and expenses in relation to transfer of investments held under PMS portfolios.

4. Portfolio Management Fees  is in nature of diversion at source before accrual as income,  and is also allowable as deduction from consideration accruing on transfer of capital assets  as well as allowable contractual expenditure for managing the portfolio, including normal activities of acquiring, holding, managing and transferring securities from which income is derived.

5. PMS fees is charged by Portfolio Managers as per contracts which are of standard nature and in accordance with SEBI Regulations of Portfolio managers. Generally charges are retained by the Portfolio Manager from remittances made to clients.

6. PMS Fees is revenue and taxable as income in hands of payees (Portfolio Managers). Tax has also been deducted and deposited as per law by assesse and TDS certificates have been issued. On this analogy also the expenses should be allowed in hands of person paying such charges.

7. Portfolio management fees has also been allowed while computing income under head ‘capital gains’ by many of Benches of ITAT.

8. This also appear that revenue has not challenged judgment of Pune Bench on this issue. Although a question on nature of income as business or capital gains has been admitted by honorable Bombay High Court. There is no question about PMS fees which was allowed by Pune Bench. Therefore, this appears to have attained finality.

9. It was also pointed out that there seems  no appeal against judgment of Delhi Bench of ITAT in case of Hero Motocorp (supra.) and Pune Bench in case of Serum Institute as discussed earlier.

j.        In recent cases Honourable Bombay Bench of ITAT has also allowed PMS charges though in some old judgments the same were not allowed.

k.       Majority view is that PMS charges are allowable.

l.         It was also informed that as per search on the website of the Supreme Court, there was no pending or disposed of case on issue of PMS in cases decided long ago in favour of assesse. Therefore, it can be said that department has accepted judgments of ITAT Pune. 

m.     In view of above factual position and judgments and taking a favourable view, PMS fees may be allowed against capital gains (on basis of proximity of head of income) or alternatively under head business.

The order of Tribunal:

Ld. Tribunal allowed PMS fees as allowable under head capital gains by following judgment of honourable Pune Bench which has attained finality.

Relevant portion from the order of Tribunal is reproduced below with highlights added by author:

9. The next ground to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance of ₹ 18,93,788/- on account of Portfolio Management Services (PMS) fees paid as not eligible for deduction while computing the capital gains of the assessee, in the facts and circumstances of the case.

10. The brief facts of the issue is that the assessee had declared Long Term Capital Gain of ₹ 36,62,053/- and Short Term Capital Gain of ₹ 7,59,397/- . For the purpose of computing the profit on sale of shares in the Short Term Capital Gain, Portfolio Management Services (PMS) expenses of ₹ 18,93,788/- was deducted by the assessee and the net amount of ₹ 7,59,397/- was offered as Short Term Capital Gain. The assessee claimed that all the share transactions in investment portfolio and services of professional portfolio managers were availed by it and PMS fee was accordingly paid. The Ld. A.O. held that the share transactions carried out by the assessee are to be considered as income from business because the services of portfolio managers were availed by the assessee. He observed that the money was given by the assessee to portfolio management services provider with the motive to earn profit. The Ld. A.O. also placed reliance on various decisions in support of his contentions.

11. It was pointed out before the Ld. CIT(A) that none of the cases cited by the Ld. A.O. ever held that transactions through Portfolio Management Services would necessarily be in the nature of business transactions. The assessee placed reliance on the co-ordinate bench decision of Pune Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs DCIT among others. The Ld. CIT(A) held that this decision of Pune Tribunal has been distinguished in several decisions rendered by Bombay Tribunal and accordingly decided this issue against the assessee. Aggrieved the assessee is in appeal before us.

12. We have heard rival submissions. At the outset, we find that the Ld. CIT(A) had accepted that the gains on sale of shares through PMS providers to be taxed under the head capital gains. Against these findings of the Ld. CIT(A), the revenue has not preferred the appeal before us as per the material available on record. The assessee placed reliance on the decision of Co-ordinate Bench of Pune Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs DCIT in ITA Nos. 499, 500, 1320 to 1322 of 2008 and 434 of 2009 and 806 of 2009 dated 31.05.2011 reported in 2011 (5) TMI 498 ITAT Pune. There were primarily two issues before the Pune Tribunal in the aforesaid cases:-

1. Whether the transactions of purchase and sale of shares carried out through PMS providers would be taxed under business income or under the head capital gain.

2. Whether PMS providers fees paid to M/s. ENAM would be allowable as deduction under section 48 of the Act.

Both the questions were decided in favour of the assesse by the Pune Tribunal.

13. The revenue preferred further appeal to Hon’ble Bombay High Court against the order. We find that the Hon’ble Bombay High Court while admitting the substantial questions of law admitted only one question which is as under:

“Whether on the facts and circumstances of the case, the ITAT was justified in holding that the income earned by the assessee by the portfolio management scheme was liable to be assessed under the head ‘capital gains’ instead of being assessed under the head ‘profit & gains of business or profession”

14. This goes to prove that the other issue decided in favour of the assessee by Pune Tribunal i.e. allowability of PMS fees as deduction under section 48 of the Act was not admitted by Hon’ble Bombay High Court. Hence the decision of Pune Tribunal had attained finality. Respectfully following the said decision, we hold that the PMS fees paid by the assessee in the sum of ₹ 18,93,788/- is eligible for deduction while computing Short Term Capital Gain. Accordingly, ground no 2 raised by the assessee is allowed.”

Un quote:

Un-necessary litigation by Revenue:

It appears that the revenue is indulging into un-necessary litigation on this issue. As noted above the revenue has not preferred appeal against judgments on Tribunal in many cases on this issue and time to file appeals have also lapsed. Before the Bombay High Court, either this issue was not challenged in case of KRA Holding or it was not admitted by honourable Bombay High Court. Author checked website of the Supreme Court and did not find any appeal of Revenue – pending or disposed of in cases decided in favour of assesse on issue of PMS Fees.

Therefore, it appears that Tax Officers (AO and CIT(A)) are deciding against assesse and disallowing PMS fees which is not proper. 

PMS fees is allowable against capital gains.

Alternate claim:

An alternate claim was made before Honourable ITAT, for the first time, that PMS fees can be allowed as business expenditure because investment is also an adventure in nature of commerce. Investments held are capital assets of such business. PMS expenses are normal expenses of such business and they must be allowed. However, as Tribunal allowed claim against capital gains, Tribunal did not consider the alternate claim.

Author hope to write another article on this aspect.