TaxTMI 
TaxTMI 
TaxTMI 
2010 (3) TMI 794
X X X X Extracts X X X X
X X X X Extracts X X X X
....76 for the Assessment Year 2003-04. Similarly, the STCG of Rs. 44,76,726 declared by the assessee was partly adjusted against the brought forward Short Term Capital Loss of Rs. 1,43,798. 3. During the course of assessment proceedings, the working of STCG and LTCG declared by the assessee was verified by the Assessing Officer and on such verification, he found that the fees paid for Portfolio Management Services (PMS) amounting to Rs. 85,63,233 was added by the assessee to the purchase cost of shares while computing the LTCG and STCG to the extent of Rs. 23,15,947 and Rs. 62,47,286 respectively. According to the Assessing Officer, the fees paid by the assessee for PMS was not a part of purchase cost of the shares. He, therefore, required the assessee to explain why the said fees should not be disallowed while computing the capital gains. In reply, the following submissions were made on behalf of the assessee vide letter dated 27-10-2006:- "The appellant has paid the aggregate sum of Rs. 85,63,233 during the year the investment Management Agreements entered into by the Appellant with 4 parties, the details of the same have been submitted in the course of personal hearings. The sai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it was also contended that the fees paid for PMS could be allocated between purchase and sale of shares for the purpose of computing capital gain. Keeping in view these alternative contentions raised on behalf of the assessee, the ld. CIT(A) required the assessee to submit a working allocating the fees paid for PMS in connection with purchase and sale of shares and also in relation to opening and closing stock of shares during the year under consideration. In reply, it was submitted on behalf of the assessee inter alia that the assessee is a pure investor and managed his portfolio on his own as well as through PMS Service providers. He also explained the tenets of the investment philosophy of the portfolio managers are as under: - "PMS are an asset management company and not a brokerage firm. They do not churn their client's portfolio to generate extra brokerage for themselves. They manage portfolios with an objective to create wealth in the long term. Their investment philosophy does not permit them to take short term view on the companies they are investing in. They are highly specialized and focused fund management house. They base all their investment decisions with relat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... up the fees paid by the assessee to the portfolio manager so as to hold that the same was relatable to the expenditure solely incurred for the purchase or transfer of assets. He held that the assessee was paying the said fees to the portfolio managers even on the interest accrued to him and dividend received and it was therefore not acceptable that the said fees was exclusively paid for acquiring or selling of shares as claimed by the assessee. The disallowance made by the Assessing Officer on account of the assessee's claim for deduction for fees paid to PMS while computing the capital gains therefore was confirmed by the learned CIT(A). 9. The Learned Counsel for the assessee submitted that the assessee had entered into Investment Management Agreement with four concerns for managing his investments and fees was paid to them for the said services. He submitted that the said fees thus was paid by the assessee for the advice given by the Investment Management Consultants for purchase and sale of particular shares and securities as well as for the advice given by them not to sale particular shares and securities. He contended that the expenditure incurred by the assessee on pay....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt in shares and that is why there is no provision for allowing deduction for the fees paid for PMS in computation of capital gains. He contended that the income can be taxed in generic terms applying real income theory, but the said theory is not relevant in respect of allowing any deduction. He contended that all the case laws cited by the ld. Counsel for the assessee are distinguishable on facts and none of them is applicable to the facts of the assessee's case and the issue specifically involved therein. He invited out attention to page No. 5 of the impugned order of the Ld. CIT(A) and submitted that the basis on which fees for PMS was paid by the assessee is such that there was no relationship with purchase or sale of shares. He contended that even without making any purchase or sale of shares and securities, the assessee was liable to pay substantial amount of fees for PMS. He therefore strongly supported the impugned order of the CIT(A) and urged that the same may be upheld on this issue. 12. We have considered the rival submissions and also perused the relevant material on record. It is observed that the profit arising to the assessee on sale of shares and securities c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar, 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 shares and securities so as to be eligible for deduction in computing capital gains under section 48. 14. As regards the case laws cited by the Ld. Counsel for the assessee in support of the assessee's case on the point under consideration, it is observed that the facts involved therein were altogether different in as much as the relevant amounts claimed by the assessee as deduction in computing capital gains were found to be in the nature of expenditure/cost covered by section 48. For instance, 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation, income is diverted before it reaches to the assessee, it is deductible, but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It was held by the Hon'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 assessee to discharge his contractual liability. It was thus a case of an obligation to apply income which had accrued or arisen to the assessee and the same amounted to a mere application of income. We, therefore, have not hesitation to hold that the payment of fees by the assessee for PMS did not amount to diversion of in....