2024 (4) TMI 1024 - AT - Income Tax

Management fees allowed as deduction in short-term capital gains computation under Section 48

Krishnamurthy Thiagarajan Versus The ACIT, Circle 6 (3), Mumbai

The ITAT Mumbai allowed the assessee's appeal on two grounds. First, regarding short-term capital gains computation under Section 48, the tribunal ... Computation of short term capital gain - allowable expenditure u/s. 48 - disallowance of claim of management fees on the ground that it is not an allowable expenditure u/s. 48 as it is not wholly and exclusively incurred in connection with transfer of asset - HELD THAT:- Section 48 of the Act gives the mode of computation of income chargeable under the head ‘Capital Gains’. The section allows deduction in respect of expenditure incurred wholly and exclusively in connection with transfer of capital asset and the cost of acquisition and cost of improvement, if any. The contention of the assessee is that the management fee paid by the assessee to BNP Paribhas is linked to earning of short term capital gain arising from transfer of securities. We find that similar issue had come up before in the case of KRA Holdings & Trading Investments Pvt. Ltd. [2013 (9) TMI 1013 - ITAT PUNE] Revenue rejected assessee’s claim of deduction of Portfolio Management Fee for similar reasons as has been expressed in the instant impugned order and ITAT allowed the claim of the Portfolio Management fees as an allowable expenditure. Similar view has been taken by the Tribunal in the case of Nadir A Modi [2017 (4) TMI 567 - ITAT MUMBAI]. In the aforesaid case payment of management fee was allowed to the assessee by placing reliance on the decision in the case of KRA Holdings & Trading Investments Pvt. Ltd [2013 (9) TMI 1013 - ITAT PUNE]. There are contrary decisions of the Tribunal on allowability of Management Fee u/s. 48 of the Act. It is a well settled proposition that when two views are possible, the view in favour of assessee should be preferred [Re. CIT vs. Vegetable Products Ltd [1973 (1) TMI 1 - SUPREME COURT]. Thus, in the facts of the case and the decisions referred above, ground No.1 of appeal is allowed. Disallowance u/s. 14A - assessee has earned income exempt from tax u/s. 10 - No suo-moto disallowance was made by the assessee for earning of exempt income - HELD THAT:- AO has straight away invoked the provisions of Rule 8D without recording dissatisfaction with regard to assessee’s claim of no disallowance of expenditure u/s. 14A of the Act. The provisions of section 14A(2) of the Act envisage that the Assessing Officer having regard to the accounts of assessee, if not satisfied with the correctness of the claim of assessee in respect of expenditure in relation to earning exempt income, then the AO shall determine the amount of expenditure incurred in relation to exempt income in connection with Rule 8D(2). Where the assessee has made any suo-moto disallowance or no disallowance u/s. 14A of the Act the provisions of Rule 8D are not attracted automatically. AO has to record his dissatisfaction having regard to the accounts of the assessee, with reference to the correctness of the claim of assessee u/s. 14A of the Act. Though no specific proforma or the manner of recording such dissatisfaction has been prescribed, nevertheless the dissatisfaction of the AO should be objective and emanate from his observations in the assessment order. In the instant case, we find that the Assessing Officer has simply recorded the submissions of the assessee and thereafter invoked the provisions of Rule 8D by referring to the decision in the case of Godrej & Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] However, the AO while referring to the aforesaid decision failed to take note of the manner in which dissatisfaction has to be recorded u/s. 14A of the Act, as explained by the Hon’ble High Court. Since, the AO has failed to record dissatisfaction as mandated u/s. 14A(2) of the Act, disallowance u/s. 14A of the Act in the instant case is unsustainable - Decided in favour of assessee. Issues Involved:1. Disallowance of Management Fee2. Disallowance under Section 14A of the Income Tax Act, 1961Summary:Disallowance of Management Fee:The assessee earned a short-term capital gain of Rs. 10,04,322/- and paid Rs. 1,71,028/- as management fee to BNP Paribas Investment Services India Pvt. Ltd. This fee was reduced from the short-term capital gains in the assessee's books. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed this fee, arguing it was not an allowable expenditure under Section 48 of the Income Tax Act, 1961, as it was not wholly and exclusively incurred in connection with the transfer of assets.The Tribunal referred to previous decisions, notably in the cases of KRA Holding and Trading Investments Pvt. Ltd. vs. DCIT and Nadir A. Modi vs. JCIT, where similar management fees were allowed as deductions. It was emphasized that when two views are possible, the view favoring the assessee should be preferred. Consequently, the Tribunal allowed the deduction of the management fee under Section 48, thereby ruling in favor of the assessee.Disallowance under Section 14A of the Income Tax Act, 1961:The assessee earned exempt income totaling Rs. 8,76,121.80 from PPF interest, dividends from bonus shares, and mutual funds but made no suo-moto disallowance for earning this exempt income. The AO invoked Rule 8D without recording dissatisfaction with the assessee's claim of no disallowance, as required under Section 14A(2) of the Act.The Tribunal noted that the AO must record dissatisfaction with the correctness of the assessee's claim before invoking Rule 8D, as mandated by the Hon'ble High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. Since the AO failed to record such dissatisfaction, the disallowance under Section 14A was deemed unsustainable. Thus, the Tribunal ruled in favor of the assessee on this issue as well.Conclusion:The appeal of the assessee was allowed on both issues, with the Tribunal ruling that the management fee is deductible under Section 48 and the disallowance under Section 14A was unsustainable due to the AO's failure to record dissatisfaction.