2010 (3) TMI 794 - AT - Income Tax

Portfolio Management Services (PMS) fees not deductible from Capital Gains, ITAT affirms decision.

Devendra Motilal Kothari Versus Deputy Commissioner of Income-tax-16 (2), Mumbai

The ITAT Mumbai held that fees paid for Portfolio Management Services (PMS) are not deductible when computing Long Term Capital Gain (LTCG) and Short Term ... Capital Gains - 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. - 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. - Held that:- Assessee 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. - There is no direct nexus with the purchase of shares and - Decided against the assessee.Diversion of income - theory of real income and the rule of diversion of income by an overriding title. - 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. Issues Involved:1. Disallowance of fees for Portfolio Management Services (PMS) while computing Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG).Detailed Analysis:Issue 1: Disallowance of Fees for Portfolio Management Services (PMS)1. Background and Assessee's Claim:- The assessee, an individual, filed a return declaring a total income of Rs. 1,40,02,396, which included LTCG and STCG from the sale of shares and securities.- The assessee added fees paid for PMS amounting to Rs. 85,63,233 to the purchase cost of shares while computing LTCG and STCG.- The Assessing Officer (AO) disallowed this addition, arguing that PMS fees were not part of the purchase cost of shares.2. Assessee's Submissions:- The assessee contended that PMS fees should be considered part of the cost of purchase and thus deductible while computing capital gains.- The assessee cited several case laws to support the claim that expenses related to managing investments should be deductible.3. Assessing Officer's Decision:- The AO rejected the assessee's claim, stating that PMS fees were not part of the acquisition cost of shares or units.- The AO held that PMS fees did not qualify as expenditure incurred wholly and exclusively in connection with the transfer of assets.4. CIT(A)'s Findings:- The CIT(A) upheld the AO's decision, noting that PMS fees were based on the market value or net value of assets and had no direct nexus with the acquisition or transfer of specific assets.- The CIT(A) emphasized that allowable deductions while computing capital gains are specifically provided under section 48, which includes:- Cost of acquisition,- Cost of any improvement,- Expenditure incurred wholly and exclusively in connection with the transfer of assets.- The CIT(A) concluded that PMS fees did not fit into any of these categories.5. Arguments Before ITAT:- The assessee's counsel reiterated that PMS fees should be deductible under section 48 as they were incurred in connection with the acquisition and sale of shares.- Alternatively, the counsel argued that PMS fees should be deductible based on the Real Income Theory and the rule of diversion of income by overriding title.6. ITAT's Analysis:- The ITAT examined whether PMS fees could be considered as cost of acquisition, cost of improvement, or expenditure incurred wholly and exclusively in connection with the transfer of shares.- The ITAT found that PMS fees had no direct nexus with the purchase or sale of shares and were payable irrespective of any specific transaction.- The ITAT noted that the assessee failed to provide a basis for allocating PMS fees to specific transactions.- The ITAT also rejected the application of the Real Income Theory and the rule of diversion of income by overriding title, stating that these principles could not override the specific provisions of the Income-tax Act.7. Conclusion:- The ITAT upheld the disallowance of PMS fees while computing LTCG and STCG, agreeing with the AO and CIT(A) that such fees did not qualify as deductible expenses under section 48.- The appeal filed by the assessee was dismissed.Summary:The ITAT Mumbai ruled that fees paid for Portfolio Management Services (PMS) are not deductible while computing Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). The tribunal upheld the decisions of the Assessing Officer and the CIT(A), concluding that PMS fees do not constitute the cost of acquisition, cost of improvement, or expenditure incurred wholly and exclusively in connection with the transfer of shares. The appeal filed by the assessee was dismissed.