TMI Blog2011 (5) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... position at the level of the Tribunal that the Portfolio management activity is an investment activity and neither the business activity nor the activity amounting to 'an adventure in the nature of trade - The expenditure is undisputedly for the twin purposes of acquisition of the securities and the sales of the same. The expenditure is arrived at on profits sharing basis, which is now allowable basis by the SEBI - Decided in favor of the assessee - IT APPEAL NOS. 499, 500,1320 TO 1322 (PN) OF 2008 AND 434 & 806 (PN) OF 2009 - - - Dated:- 31-5-2011 - I. C. SUDHIR, D. KARUNAKARA RAO, JJ. M.P. Mahajavi and R.D. Onkar for the Appellant. A.S. Singh for the Respondent. ORDER 1. There are seven (7) appeals under consideration involving two group assessees, namely, M/s. KRA Holding Trading P. Ltd. (AYs 2004-05, 2005-06 2006-07) and M/s. ARA Trading Investment (P.) Ltd. (AYs 2002-03, 2004-05, 2005-06 2006-07). During the proceedings before us, at the outset, Ld Counsel mentioned that these two assessees got amalgamated with RDA Holding Trading Ltd. vide judgment No. 1323 of 2008 and in this regard, the assessee's counsel filed a copy of the judgment of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t issue was already adjudicated vide ITA Nos. 499 500/PN/08 dt. 31.8.09 in the first round. Thus the 2nd issue at Ground 4 relating to Fee paid to ENAM is required to be adjudicated here. 1322/PN/08 2005-06 Present No 1st issue was already adjudicated vide ITA Nos. 499 500/PN/08 dt. 31.8.09 in the first round. Hence it is a covered issue. 806/PN/08 2006-07 Present No 1st issue was already adjudicated vide ITA Nos. 499 500/PN/08 dt. 31.8.09 in the first round. Hence it is a covered issue. 3. The above table reflects that a couple of issues are involved in all the grounds of the appeals involving two assessees, (i) relating to whether the income earned on sale of shares is to be assessed under the head 'Profits and gains of business or profession' or under the head 'Capital gains' and (ii) allowability of the fee paid to the Asset Management Company. 4. Regarding the first issue, the parties mentioned that it was the subject-matter of the appeal for adjudication before this Tribunal in the first round of the proceedings in the assessee's own case in connection with appeals ITA Nos. 499 500/PN/08 and the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KRA Holding Trading (P.) Ltd. is concerned, the grounds 1 to 3 of ITA No. 1320 for A.Y 2005-06 and the ground Nos. 1 to 3 of ITA No. 434/PN/09 for AY 2006-07 relating to the issue of 'head of income', stand covered and accordingly, adjudicated in favour of the assessee. Accordingly, the said grounds are allowed in favour of the assessee. 7. Further, so far as the appeals by M/s. ARA Trading Investments (P.) Ltd. is concerned, the ground Nos 1 to 4 of ITA No 1321 1322/PN/08 806/PN/09 are also covered in favour of the assessee. Accordingly, the relevant grounds of all these appeals are allowed in favour of the assessee. 8. Now we proceed to take up the second issue relating to the fee paid to Asset Management Company in the succeeding paragraphs. Allowability of the fee paid to M/s. ENAM, Portfolio Manager 9. As evident from the above referred chart, the only issue that is required to be adjudicated by us in appeals (ITA Nos. 500/PN/08, 1320/PN/08, 434/PN/09 of KRA Holding Trading (P.) Ltd., and 499/PN/08 of ARA Trading Investments (P.) Ltd., relate to the issue of allowability of the fee paid to the Asset Management Company. In the process, we pick up the recalle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee's claim and held that the assessee paid the said amount of Rs. 59,15,574 in the name of TF/Performance fee by calculating the fee on return sharing basis, which is against the said clause 14(3). As per the AO, the above payment to ENAM constitutes the transfer of gains of the assessee to the tune of 38% of the total gains, i.e. Rs. 59,15,574/1,56,76,802. The concluding para of the AO reads as follows: "It is therefore clear that payment of Rs. 59,15,574 as termination fees which is computed on profit sharing basis is neither specifically provided in the agreement nor is as per SEBI Rules and Regulations. The same is therefore disallowed. Further no mention of fees paid is made in the return as gains on sale of shares are net of such fees paid is made in the return as gains on sale of shares are net of such fees and computation of such gains is not enclosed with the return." 12. Aggrieved with the above addition, the assessee filed an appeal before the CIT(A) and made various submissions which are reproduced in paras 5.1 and 5.2.1 of the impugned order. By these submissions, the assessee submitted that the said expenditure was incurred in connection with the acquisition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the fees loaded would represent expenditure incurred wholly and exclusively in connection with the transfer. Further the assessee filed another letter dated 1-10-2007 explaining the reason for payment to ENAM and the nature of the same and the mode of calculation of the payment. The details are mentioned in para 5.2.1 of the impugned order. The summary of the same is as under: "In summation, the following facts emerge from the above submissions: (A) the fees are paid wholly and exclusively for earning the income offered to tax under the head 'Capital gains'. (B) the fees paid have a direct, proximate and one to one nexus with earning of capital gains and (C) the Company has already undertaken a contractual obligation to divert its profits to the extent of profit sharing fees to the portfolio manager and has accepted to receive the sale consideration/profits net of such fees." On hearing the appeal of the assessee and after considering the submission, the CIT(A) is of the view that the assessee's submission are not acceptable and accordingly dismissed the relevant grounds of the assessee. BEFORE THE TRIBUNAL 14. Aggrieved with the above order of the CIT(A), th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , one by taking full value of consideration i.e. net of such payments or deducting the same as expenditure incurred wholly and exclusively in connection with the transfer. As per Hon'ble High court opined that the "Legislature, while using the expression 'full value of consideration', has contemplated both additions as well as deductions from the apparent value. What it means is the real and effective consideration. The effective consideration is the after allowing the deductible expenditure. Further, as per the His Lordship, "so far as clause (i) of section 48 is concerned, we find that the expression used by the Legislature in its wisdom, is wider than the expression "for the transfer". The expression used is "the expenditure incurred wholly and exclusively in connection with such transfer". The expression "in connection with such transfer" is, in our view, certainly wider than the expression "for the transfer". Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause". Eventually, Hon'ble High Court allowed the legal fee genuinely and necessarily incurred by the assessee in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets. Whereas, in the instant case, as Sri Mahajani, the assessee not only demonstrated the direct nexus of the impugned expenditure to the acquisition and sale/transfer of the securities successfully but also the fee in question is strictly on the NAV of the securities and not on the dividends or other miscellaneous income. Regarding the basis of calculations, Ld. Counsel mentioned that the clause 14(3) has undergone change by virtue of the amendments by the SEBI and 'profit sharing basis' is the SEBI approved basis now. Further on the issue of agreed rate of 5% on the NAV of securities, Ld Counsel argued stating that the basis is totally and exclusively capital-value-oriented, consistently followed by the assessee and it constitutes acceptable basis in view of the judgment of the Apex Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61. Finally, the counsel mentioned that the if the claimed deduction is not allowed under section 48 of the Act, the same is not allowed by the revenue under any other provisions of the Act and it constitutes an unfair act on part of the revenue. More so, when the expenditure of fee paid to Portfolio Manager in question i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the period expires. Secondly, regarding the allegation of SEBI Regulations, assessee's stand is that the said clause 14(3) has been amended to include the payment of fee on 'profits sharing basis' too. Therefore, there is no infringement of the said clause and consequently, the invoking by the CIT(A) of the provisions of Explanation to section 37(1) of the Act does not arise. 21. In the context of the above rival positions, we proceed to examine the scope of the provisions of section 48 of the Act, amended SEBI Regulations in matters relating to fee payable to Portfolio managers, the matters relating to the distinguishing of the decisions cited by the revenue etc. A. Scope of the Provisions of section 48 of the Act: 22. Section 48 provides for the method of computation of capital gains. The relevant provisions read as follows: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. We have already referred to the facts of the case in detail earlier. It cannot be disputed that unless the assessee had settled the dispute with Radia and Sons (P.) Ltd., the sale transaction with M/s. Cosmos Co-op Housing Society Ltd. under the agreement dated March 30, 1967, would not, rather could not, have materialized. If this transaction had not materialized there would perhaps have been no question of capital gains. The sale would then have taken place at the rate of Rs. 29 per sq. yard as against Rs. 51 per sq. yard. One way of looking at the problem could be to say that the full value of the consideration in this case was not the apparent consideration, i.e. Rs. 2,58,672, but Rs. 2,23,168 (i.e. 2,58,672 minus Rs. 35,501). The Legislature, while using the expression 'full value of consideration', in our view, has contemplated both additions as well as deductions from the apparent value. What it means is the real and effective consideration. That apart, so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. AAR held in the case of Compagnie Financiere Hamon, In re [2009] 310 ITR 1/177 Taxman 511 (AAR-New Delhi) that the 'professional fee paid to the lawyers distinctly related to and integrally connected with the transfer of shares is admissible for deduction under section 48 (i) of the Act' AAR held that the what is attributable to the final act of transfer of shares is admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. C. In the case of CIT v. Bradford Trading Co. (P.) Ltd., [2003] 261 ITR 222/[2002] 125 Taxman 632 the Madras High Court held that the "amount paid by the assessee to a third party to settle the pre-existing claims against the transfer of the assets as also litigation expenses constituted expenditure incurred wholly and exclusively for transfer of capital asset and was deductible in computation of capital gains; the amount reimbursed by vendee to the assessee towards such claim constituted part of sale consideration but deductible while computing capital gains". D. Bombay High Court in the case of CIT v. Abrar Alvi [2001] 247 ITR 312/117 Taxman 95 held that the amount paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. After explain the scope of section 48 of the Act, we shall now proceed to examine the facts of the case in general and the applicability of the provisions of section 48 in particular. 28. We have already detailed the facts of the impugned payments in the preceding paragraphs. To sum up the same, the undisputed facts are: (i) the assessee made the payment of fee to M/s. ENAM, the Asset Management Company and the genuineness of the said payment is undisputed; (ii) the revenue authorities have also not disputed the requirement or necessity of the said payments; (iii) quantitatively speaking in view of the adverbial expression, 'wholly' used in section 48(i) of the Act, we find that the payment of fee @ 5% only restricted to the NAV of the securities and not only the global turn over including the other income; (iv) regarding the purpose of payment in view of the adverbial expression, 'exclusively used in section 48(i) of the Act, we find that the same is intended only twin purpose of the acquisition of the securities and also for sale of the same; (v) the NAV is defined in Para 1(d) as the 'net asset value of the securities of the client' and the assessee calculated the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, require to be rejected and in favour of the assessee. Capital gains v. Deductions 30. We have discussed in the preceding paragraphs that the profits earned by the assessee is chargeable to tax under the head 'capital gains'. It is so ordered by this Tribunal vide the order dated 31-8-2009 in connection with appeals ITA No. 499/PN/08 in the case of ARA Trading Investments (P.) Ltd. and ITA No 500/PN/08 in the case of KRA Holding Trading P. Ltd. Relevant para 27 of the said order was already extracted in the preceding paragraphs. In the light of the above undisturbed proposition, our attention is restricted to the limited issue of if the impugned fee paid to the M/s. ENAM is allowable under section 48 of the Act or not. Loading of the expenditure to the cost of the shares, distinguishing of the Tribunal's order in the case of Davendra Motilal Kothari (supra): 31. Ld. DR for the Revenue relied on the above decision of the Tribunal and mentioned that the order of the CIT(A) does not call for any interference despite the fact that the order is not considered the above citations. In this regard, Ld. Counsel filed at our request a brief note on the issue of loading and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the purchase and sale of investments during the year and fees is not paid on interest and dividend received by the appellant. It is respectfully submitted that the said decision is not applicable as it turns on its own facts apart from being patently wrong. The assessee in that Kothari's case had failed to demonstrate the nexus between the fees paid and the activity of purchase and sale. The assessee could not explain how the fees paid on such explicit basis could be considered differently so as to constitute cost of either acquisition or as expenditure in connection with transfer. The assessee could not demonstrate how allocation of fees had been made. It could not furnish details of how or the basis on which a location of said fees was possible Further fees had to be paid even when no purchase or sale took place. The CIT(A) had held that it was not possible to break up the fees so as to hold that the same was relatable to purchase or sale of shares. Further, fees were paid even on interest accrued and dividend received. The Tribunal held that the basis on which fees were paid is such that there was no relationship with either purchase or sale. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year]. Automatically these fees are taken into account for computing capital gains or the carrying cost of unsold investments. The Supreme Court in the case of UP State Industrial Development Corporation (225 ITR 703) was dealing with the case of an underwriter of shares who had to subscribe to shares in the event of under subscription by the public. The issue before the Supreme Court was whether in respect of such devolved shares whether the underwriting commission received from the client, should be treated as an item of income or an item that would go to reduce the cost of acquisition of such devolved shares. The Supreme Court, applying the well accepted proposition that for the purposes of ascertaining profits and gains ordinary principles of commercial accounting should be applied so long as they are not in conflict with any express provision of the Act upheld the contention of the assessee which it found to be in consonance with the general principles of accountancy governing underwriting contracts. In the present case since the Department is not contending that the accounting practice followed by the company is contrary to general principles of accountancy governing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chases and hence cost of acquisition." 32. From the above, it is evident that the unlike in the transactions involving acquisition and sale of the land buildings, the loading of the expenses i.e. fee paid to the AMC is done in accordance with the AS-13 i.e. cost of an investment includes acquisition charges such as brokerage, fees and duties. Further, once the liability to incur is certain the quantification does not bar the assessee from claiming the expenditure. The claim of the assessee must be allowed once the basis of quantification is scientific and reasonable. The method of accounting followed by the company consistently in respect of fees paid is to proportionately load these fees on the securities handled by Portfolio Manager during the year. FINDINGS OF THE TRIBUNAL 33. Thus, the issue for adjudication relates if the payment of fee paid to the portfolio manager i.e. ENAM for the twin purposes of (i) purchase of investments/securities and (ii) sale of the same is an allowable deduction under section 48 of the Act or not. The same has to be decided in the context of settlement of the disputes relating to correct head of income. In other words, the issue relating to 'h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer, (ii) it is genuinely incurred as accepted by the revenue; (iii) it is a bona fide payments made as per the norms of the 'arm's length principle' since the M/s. ENAM and the assessee are unrelated; (iv) necessity of incurring of expenditure is imminent and it is in the normal course of the investment activity; and (v) read down provisions of section 48 of the Act in view of the said ratio in the case of Smt. Shankuntala Kantilal (supra) accommodate the claim of such expenditure legally. 35. Further, the decision of the Tribunal in the case of Davendra Motilal Kothari (supra), which was heavily relied upon by the Ld. DR for the revenue unfortunately did not refer to the said 'read down' interpretation in the cited judgment of the jurisdictional High Court in the case of the Smt. Shankuntala Kantilal (supra). In any case, we find the said order of the Tribunal is distinguishable on fact in general and the discharging of the onus of the assessee in demonstrating the direct linkage of the expenditure to the shares as well as the claim of fee on the entire turnover on global basis i.e. not restricted to investments only. As such, it is a settled issue that the expression 'in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said twin purposes of acquisition and sale of the securities, the claim has to be allowed. Further, it is an admitted fact that the bifurcation of expenditure is not possible in the given facts of the case and the payment is for composite services, wholly and exclusively in connection with transfer of the transfer of the securities. The expenditure is undisputedly for the twin purposes of acquisition of the securities and the sales of the same. The expenditure is arrived at on profits sharing basis, which is now allowable basis by the SEBI. The expenditure is composite one as it is for the both the purposes. There is no bifurcation either by the assessee or by the revenue. In our opinion, there is no requirement of bifurcation of the expenditure i.e. a segment to form part of the cost of acquisition and other segment relating to transfer of securities to reduce the profits as it is not the case of the revenue that it shall make some difference from the tax point of view. Therefore, we resist from entering into that controversy. 37. Next, we proceed to explain the expression 'such transfer' used in section 48 of the Act. The expression 'transfer is defined section 2(47) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N/08 2005-06 2. 434/PN/09 2006-07 [By KRA Holding Trading (P.) Ltd.] 3. 1321/PN/08 2002-03 4. 1322/PN/08 2005-06 5. 806/PN/09 2006-07 [By ARA Trading Investments (P.) Ltd.] 40. We have tabulated the issues raised in the grounds raised by the two assessees namely KRA Holding Trading (P.) Ltd. and ARA Trading Investments (P.) Ltd. in the appeals mentioned above. As summed up in the said table, there are only two issues in all the grounds of the said appeals and they are: (i) whether the portfolio activity amounts to the business activity or the investment activity and proper head of income for taxing the earning of this activity; and (ii) allowability of the 'Fee paid by the assessee to the Portfolio Manager i.e. M/s. ENAM, the AMC under section 48 of the Act. As detailed above, the 1st issue has been adjudicated by the Tribunal vide the appeal ITAs 499 500/P/2008 in favour of the assessees. This issue is common in all the other appeals under consideration here. Considering the commonality of the facts, parties and the issue, we of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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