2012 (8) TMI 195 - AT - Income Tax

Income from shares classified as capital gains, not business income. Portfolio management fees deductible.

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal. The income from the sale and purchase of shares was classified as capital ... Treatment to the income earned from sale and purchase of shares - Capital gain or business income ? - Held that:- As the issue stands covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for A.Y. 2004-05 allowing the claim of Short term capital gain and Long term capital gain on sale of shares and redemption of mutual funds - as no decision reversing the decision of the Tribunal was filed & in absence of any contrary material brought to notice against the order of the Tribunal - decided against revenue. Fees paid to portfolio manager of Asset Management Company - should be allowable in computing income whether under the head “Business” or under the head “Capital gains' ? - Held that:- As decided in Homi K. Bhabha Vs. ITO [2011 (9) TMI 104 - ITAT MUMBAI]professional Fee or Management fee to portfolio manager is not deductible against capital gains - Considering the genuineness and essentiality of the payment of fee to the Portfolio manager and undisputedly for the predominantly for the said twin purposes of acquisition and sale of the securities, the claim has to be allowed - the claim of the must not be rejected for want of the express provisions in section 48 - decided in favour of assessee. Issues Involved:1. Classification of income from sale and purchase of shares as Capital Gains vs. Business Income.2. Allowability of Portfolio Management Fees as a deductible expense.Detailed Analysis:1. Classification of Income from Sale and Purchase of Shares:Revenue's Argument:The Revenue contended that the income earned from the sale and purchase of shares should be treated as business income due to the systematic and continuous manner in which the transactions were carried out, indicating a profit motive. The Revenue also argued that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in relying on the ITAT's decision for A.Y. 2004-05, which was still pending before the High Court.Assessee's Argument:The assessee declared Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG) on the sale of shares and mutual funds, treating the activities as investment activities. The assessee relied on the ITAT's decision in their favor for A.Y. 2004-05, which allowed the gains to be treated as capital gains.Tribunal's Decision:The ITAT upheld the CIT(A)'s order, which followed the Tribunal's earlier decision in the assessee's case for A.Y. 2004-05. The Tribunal noted that the facts and applicable law were consistent across the years in question. Since the High Court had not reversed the Tribunal's earlier decision, the ITAT found no reason to deviate from its previous ruling. Therefore, the income from the sale and purchase of shares was to be treated as capital gains, not business income. The grounds raised by the Revenue were dismissed.2. Allowability of Portfolio Management Fees:Assessee's Argument:The assessee claimed an amount of Rs. 2,11,95,334 as portfolio management fees paid to Enam Asset Management Company Pvt. Ltd., arguing that these fees were allowable in computing income under the head 'Capital Gains.'Revenue's Argument:The Assessing Officer (AO) disallowed the fees, treating them as termination fees not specifically provided in the agreement and not as per SEBI rules and regulations. The AO's decision was based on similar disallowances in previous assessment years, which had been upheld by the CIT(A).CIT(A)'s Decision:The CIT(A) upheld the AO's disallowance, reasoning that the fees were not in accordance with SEBI guidelines and were not allowable under either 'business' or 'capital gains' heads.Tribunal's Decision:The ITAT referred to its earlier decision in the assessee's case for A.Y. 2004-05, where it allowed the claim of portfolio management fees. The Tribunal found that the fees were genuinely incurred and necessary for the transfer of securities. The Tribunal emphasized that the expenditure was connected to the acquisition and sale of securities and should be allowed under Section 48 of the Income Tax Act. The Tribunal also noted that the SEBI regulations had been amended to allow performance-based fees. Therefore, the Tribunal allowed the claim of portfolio management fees as a deductible expense from capital gains.Conclusion:The appeal filed by the Revenue was dismissed, and the appeal filed by the assessee was allowed. The Tribunal's decisions were based on the consistency of the facts and law across the assessment years and the binding nature of its previous rulings in the assessee's favor. The income from the sale and purchase of shares was to be treated as capital gains, and the portfolio management fees were allowable as a deductible expense.