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Capt. Avinash Chander Batra Versus Dy. CIT., Range, 2 (3) , Mumbai and Vica-Versa

2016 (5) TMI 155 - ITAT MUMBAI

Disallowance of an amount being Management Expenses incurred for earning Short term capital gain - Held that:- PMS expenses 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. - Decided against assess .....

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(Appeals) - 6, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2008-09. 2. 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 ₹ 20,04,393/- being Management Expenses incurred for earning Short term capital gain. Your appel .....

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of ₹ 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 ₹ 92,17,544/- arising out of PMS accounts held with various funds, out of which ₹ 23,56,127/- was earned from short term capital gains . The A.O. further observed that assessee has , inter-ali .....

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referred an appeal before the CIT(A). 5. 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 as .....

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so 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 allow .....

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nd 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 ₹ 5,75,136/- relatable to short term capital gains and 45% thereof being sale to purchase ratio , in relation to short term capital gai .....

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extent of ₹ 2,59,879/- and disallowance of the rest of the amount i.e. ₹ 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. 7. The ld. Counsel for the assessee submitted that the assessee is a salaried employee an .....

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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. .....

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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 ITA no. 94/PN/2012 , 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 whi .....

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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 .....

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nagement services expenses of ₹ 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 ₹ 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 ₹ 2,59,879/- which was allowed by the CIT(A) towards .....

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sset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of ₹ 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 .....

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isions 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 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 ₹ 22,64,272/- paid by the assessee can be allowed as deduction from the full value of consideration received or ac .....

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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 .....

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gulate , 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 t .....

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isions 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 Manage .....

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ient, 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 .....

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stry; (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; (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 termi .....

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ports 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 th .....

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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 deri .....

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tfolio 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 emplo .....

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n 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, advise .....

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o 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 rangi .....

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ities 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 .....

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pecialized 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 et .....

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ing 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 m .....

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r 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 he .....

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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 fee .....

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f 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 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 sh .....

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e, 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 .....

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ng 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 .....

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rsion 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 observed by the Hon'ble Sup .....

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'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 a .....

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l 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 .....

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ce 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 K .....

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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] 19 .....

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mt. 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 ₹ 20,04,393/- paid to portfolio managers being management expenses i .....

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ed. ITA No. 7439/Mum/2011 the for assessment year 2008-09 (Revenue s appeal) 11. This appeal filed by the Revenue is disposed of because the tax effect in the appeal is less than ₹ 10 lacs 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. 12. The ld. D.R. submitted that tax effect involved in this appeal is less than ₹ 10 lac .....

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