TMI Blog2010 (3) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... le. - Held 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. - the theory of real income cannot be applied to allow deduction to the assessee which is otherwise not permissible under the Income-tax Act. - Decision of Apex Court in CIT v. Udayan Chinubhai [1996 (8) TMI 3 - SUPREME Court] followed. - 1356 (MUM.) OF 2008 - - - Dated:- 25-3-2010 - P.M. JAGTAP, V.D. RAO, JJ. Y.P. Trivedi and P.R. Toprani for the Applicant. Ankur Garg for the Respondent. ORDER P.M. Jagtap, Accountant Member. This appeal filed by the assessee is directed against the order of the CIT(A) XVI, Mumbai, order dated 28-11-2007 and the solitary issue arising out of the same relates to the disallowance made by the Assessing Officer and confirmed by the CIT(A) on account of assessee's claim for deduction on account of fees for Portfolio Management Services (PMS) while computing Long Term Capital Gain (STCG) and Short Term Capital Gain (STCG) arising from sale of shares and securities. 2. The assessee in the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madras High Court in the case of CIT v. Ramnathan Cherrair 152 ITR at page 489 held as under: ...that the expenses incurred in connection with the preparation of the layout land and getting it sanctioned would have to be taken as expenses solely incurred for the transfer of the lands for better price other expenses such as salary to the clerk for attending to the expenses incurred exclusively for the transfer of lands. It is respectfully submitted that the various expenses incurred and the fees paid to the Investment Manager are allowable as expenses from the capital gains as claimed by the appellant. 4. The Assessing Officer did not find merit in the above submissions made by the assessee and proceeded to disallow, the deduction claimed by the assessee on account of fees for PMS while computing LTCG and STCG holding that the same was not part of cost of acquisition of shares or units. 5. The disallowance made by the Assessing Officer on account of fees paid for PMS while computing LTCG and STCG was challenged by the assessee in an appeal filed before the Ld. CIT(A). During the course of appellant proceedings before the CIT (A), it was submitted on behalf of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchases, short term purchases, long term capital sale, short term capital sale and closing stock and based on such allocation, deduction may be allowed while computing Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). 7. The Ld. CIT(A) did not find merit in the submissions made on behalf of the assessee before him. From the copies of the agreement filed by the assessee with two portfolio managers, he found that the quantification of their fees was based on either the market value of the assets or net value of the assets of the assessee as held by them either at the beginning or at the end of each quarter. He held that the assessee could not explain as to how the fees paid to the portfolio managers on such explicit basis could be considered differently so as to constitute either the cost of acquisition of asset or expenditure incurred for selling such assets. He noted in this context that nothing was furnished by the assessee to establish any such nexus. 8. The Ld. CIT(A) also noted that the deductions which are allowable while computing capital gain are specifically provided under section 48 as under: - (i) the cost of acquisition of the assessee, (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Without prejudice to his contention that the fees paid for PMS was deductible under section 48 in computing capital gains and as an alternative, the Ld. Counsel for the assessee contended that the said expenditure was deductible even on the basis of Real Income Theory and the rule of diversion of income by overriding title. In this regard he contended that the said fees was in the nature of a charge against the consideration received by the assessee on sale of shares and securities and therefore was deductable from the sale consideration being diversion of income by overriding title. In support of this contention, he relied on the following case laws: l Jt. CIT v. Video Electronics Ltd. [2006] 99 ITD 342 (Delhi). l ITO v. Prakash Roadlines Corpn. [1992] 40 ITD 406 (Cal.). l CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC). l CIT v. Crawford Bayley Co. [1977] 106 ITR 884 (Bom.). l Smt. Savita Mohan Nagpal v. CIT [1985] 154 ITR 449/22 Taxman 371 (Raj.). 11. The Learned DR on the other hand submitted that the relevant provisions in respect of computation of income from capital gains are very specific and the real income theory cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely 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. 13. 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 pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itle 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. 16. In the case of Sitaldas Tirathdas (supra), it was held by the Hon'ble Supreme Court that the true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, are there in every case, but it is the nature of the obligation which is the decisive fact. Explaining, further, it was observ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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