TaxTMI 
TaxTMI 
2011 (5) TMI 498
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....essee filed appeal on 20-10-2008 as against due date 10-9-2008 and the delay is not without any reason. In this regard, the Counsel mentioned that the concerned employees as well as consultants were busy with the Scheme of Amalgamation and the proceedings before the Hon'ble High Court. In this regard, the Counsel filed an Affidavit of Shri Vasant A Potbhare, who is key person in filing of the said appeal. On examining the facts detailed in the said Affidavit, which are not controverted by the revenue with evidences and after hearing the ld. DR, we find that the delay is required to be condoned. 2. Assessee's counsel filed the following table providing the bird's view of the appeals and the issues pending for adjudication before us are tabulated as under: ITA No/A.Y Two Issues raised in grounds Remarks 1st Issue: Business income/ Capital Gains 2nd Allowability of fee paid to ENAM, the AMC (2) (3) (4) (5) 1. KRA Holding and Trading (P.) Ltd 500/PN/08 2004-05 Already adjudicated in the 1st round of the proceedings before ITAT. Order of Tribunal is recalled only for adjudicating this issue. In the first round, ITAT passed an order dt. 31-8-0....
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....d the plethora of precedents unmistakably points out that the assessee was not directly involved in the trading activity. Therefore its holding was nothing but an investment. What is decisive is the conduct and the intention of an investor which has been established in the present appeal that the appellant had simply acted in the fashion to maximize the value of its wealth holding, in the shape of shares. Such an activity cannot be held a profit making activity of a business concern but safely it cane held as a profit seeking activity of an investor. Resultantly our view goes in favour of the assessee, thus the grounds are allowed." 5. On mentioning that the said ground relating to the chargeability of the earning on sale of the shares under the 'capital gains is already adjudicated, Ld. counsel mentioned that the said order of the Tribunal had to be recalled as it failed to adjudicate other ground relating to the allowability of the claim of deduction relating to the fee paid to the asset management company debited to the P& L account. Therefore, the Tribunal recalled the said orders i.e. ITA Nos. 499 & 500/PN/08 for limited purpose of adjudication of the ground 2 relating to t....
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....se of KRA Holding & Investment (P.) Ltd. for the assessment year 2004-05 is relevant for facts and discussions. 10. Otherwise, the AO dealt with this issue of payment of fee to ENAM Asset Management (P.) Ltd. (in short 'ENAM') in his order. Relevant KRA Holding & Investment (P.) Ltd. for the assessment year 2004-05 are that the assessee debited a sum of Rs. 69,22,396, which includes termination fee (TF) of Rs. 59,15,574 and annual maintenance fee (MF) of Rs. 10,06,823. After hearing the assessee and considering his submissions, the AO found that TF has to be disallowed. Accordingly, he made an addition of Rs. 59,15,574. While disallowing the claim, the case of the AO is that the said payment constitutes 'profit sharing fee' paid to ENAM and the same is not authorized or borne out of either by any agreement between the assessee and the ENAM or the SEBI (Portfolio Managers) Rules & Regulations, 1993. As per the AO, vide sub-clause (c), clause 7, a termination fee of up to 5% will be payable and the same calculaled on the net asset value (NAV) of the portfolio on the date of termination of the agreement period. As per the AO, the agreement was never terminated as it is renewed from....
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....ermination of period of agreement are distinctive activities, so the amount in question is payable on termination of the period and not the termination of the agreement and relied on Clause 2 of the agreement relating to the fee. Regarding basis of termination fee computation, the same is payable at the rate of 5% of the NAV of the portfolio of the client and mentioned that NAV is defined in the said agreement. Expanding on the issue of the basis of 5%, the assessee argued that the basis is scientific and consistently followed by the assessee over the years. The actual payment in fact is within the limits provided under the agreement. Further, he argued that as of now, there is no issue about whether the said income is taxable under the head 'Profits and gains from the business or profession'; or under the head 'Capital gains' since the said issue is already decided by the Tribunal vide order dated 31-8-2009 in favour of the assessee, i.e. the said profit constitutes capital gains taxable under the head 'Capital gains' as the securities in question constitutes capital assets/investment. Considering the fact that there is no dispute about genuineness of the payment, the said payment....
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....cial arguments are narrated as under: (i) Ld. Counsel referred to the provisions of section 48 of the I.T. Act and mentioned that the said section allows deduction of any expenditure incurred wholly and exclusively in connection with the transfer and the instant expenditure being the outflow to the assessee, should be loaded to the cost of the investments. In this regard, the assessee relied on Gujarat High Court judgment in the case of Rajkot District Gopalak Co-op. Milk Producers' Union Ltd. v. CIT [1993] 204 ITR 590/[1994] 77 Taxman 346, for the proposition that what is taxable in the hands of the assessee is the actual income that reached the assessee and therefore, the fee paid to M/s. ENAM has to be deducted from the capital gains earned by the assessee. Ld. Counsel reminded that the taxing of the said profits on sale of the securities under the head of 'Capital gains' has reached finality. Therefore the fee incurred by the assessee should be given deduction under section 48 of the Act. Relevant para of the said decision is reproduced as under: "What is taxable is the real income, it is that income which reaches the assessee that has to be regarded as the real income. Paym....
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....s, the assessee submitted before the first appellate authority that the fee paid was correctly claimed as deduction the commutation of capital gains. On hearing the above, the CIT(A) perused the order of the AO and extracted the same in his order, as seen from para 5.3 of the impugned order and held that the AO has rightly disallowed the sum of Rs. 59,15,574 and also for other reasons that the said payment was paid in violation of the SEBI Regulations, i.e. Clause 14(3) of the SEBI (Portfolio Managers) Rules & Regulations, 1993. 17. Arguments of the Revenue: Per contra, Ld. DR for the revenue argued vehemently and some of his arguments are as follows. (i) the expenditure is question is directly unconnected to the securities in question and there is the same cannot be loaded to the cost of the acquisition; (ii) securities is a plural word, where as the capital gains is calculated considering each capital asset on stand alone basis and for this there is need for identification of the asset specific expenditure be is for arriving at cost of acquisition or for transfer specific expenditure. Relying on the decision of the Tribunal in the case of Davendra Motilal Kothari v. Dy. CIT [2....
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....s under section 48 of the Act is the issue for adjudication before us. The stands of the parties on this issue are as follows. As per the Revenue, while the AO made disallowance for couple of reasons: (i) the payment is not as per the agreement, as the agreement was never terminated in reality; (ii) the payment was not authorized by the SEBI Regulations, 1993, CIT(A) authority confirmed the said disallowance also for another reasons that the said payment attracts provisions of the Explanation to sub-section (1) of section 37 of the IT Act. The said fee is not allowable in view of the decision of the Tribunal of Mumbai Bench in the case of Davendra Motilal Kothari (supra) where the Tribunal held that when the assessee failed to demonstrate the nexus of the said expenditure with the purchase and sale transactions of the said capital assets i.e. securities, the fee paid to the portfolio managers is not an allowable expenditure under section 48 of the Act. 20. Per contra, the case of the assessee is that the said decision of the Mumbai Bench Tribunal is distinguishable on facts relating to discharge of onus relating to nexus issue and also in matters of global turnover based clai....
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....ssessee as the provisions of clauses (i) and (ii) are wider. As the Hon'ble High Court, "such type of payments are deductible in two ways, one by taking full value of consideration i.e. net of such payments or deducting the same as expenditure incurred wholly and exclusively in connection with the transfer." In other words, so long as the expenditure in question is genuine and are incurred in connection with the transfer of the securities, the expenditure is allowable from the 'full value of the consideration received or accruing', itself . Meaning thereby, the impugned expenditure is reduced from the 'gross value of the consideration received or accruing, and the 'net value of the consideration received or accruing' will be further reduced by the expenditure mentioned in clauses (i) and (ii) of section 48 of the Act. The second way of dealing with the said genuine expenditure relates to the one specified in clause (i) and clause (ii). The assessee must be given benefit of the deduction as the same is incurred wholly and exclusively for the transfer of the securities. For the sake completeness of this order, relevant paras 5 & 6 are reproduced as follows: "5. It must be stated i....
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....ransfer" is, in our view, certainly wider than the expression "for the transfer". Here again, we are of the view that any amount the payment of which is absolutely necessary to effect the transfer will be an expenditure covered by this clause. In conclusion, it is respectfully submitted that the fees paid have been correctly claimed as deduction in the computation of capital gains..............." 23. The scope of section 48 as per the binding judgment of the Hon'ble High Court is that the claim of bona fide or genuine expenditure should be allowable in favour of the assessee so long as the incurring of the expenditure is a matter of fact and the necessity of making such a payment is the imminent and the requirement for the transfer the transfer of the asset. It is now binding on our part to take the view that the expressions 'in connection with' has wider meanings than the expression 'for the transfer'. The Revenue's contention is that the language in which section 48 does not contemplate deduction of such an amount was overruled and allowed the deduction of the fee incurred by the assessee for removal of the encumbrances, which is necessary for transfer of the asset in that cas....
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....aid by the assessee to the hutment dwellers is an allowable expenditure in computing the capital gains. E. In the case of Davendra Motilal Kothari (supra), the Mumbai Tribunal held that the payment of fee to the PMS to discharge his contractual liability did not amount to diversion of income by overriding title. It is a case of application of income. In this case, the assessee claimed expenditure of the fee paid to PMS on his global turn over and assessee failed to discharge onus in establishing the nexus of the expenditure with the asset's transfer. Tribunal did not refer to the explanation given by the binding jurisdictional High Court on the provisions of section 48 of the Act. 25. From the above, it is invariably learnt that the scope of the provisions of section 48 are explained by the jurisdictional High Court and it is binding on us as they remain undisturbed as informed to us. The citation at E above did not have benefit of the said explaining of the provisions of section 48 of the Act. For allowing the claim of deduction in the computation of the capital gains, the expenditure has to be distinctly and intricately linked to the asset and its transfe....
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....the Portfolio of the client as on the date of termination of the agreement period and not the agreement itself and therefore payment is period specific; (vii) it is a fact that the clause 14(3) was amended subsequently and therefore, the action of the revenue is based on the inapplicable or pre-amended facts. The details are detailed belows. Clause 14(3) of SEBI (Portfolio Managers) Rules & Regulations 1993: 29. Revenue is of the bona fide belief or opinion that the clause 3(a) prohibits the payment of fee on the basis of 'returns sharing basis' as they relied on the original clause 14(3) of SEBI (Portfolio Managers) Rules & Regulations, 1993 which governs the portfolio manager which bans the payment of fee to the portfolio manager. In this regard, Ld. Counsel filed a Gazette copy showing the amended clause 3 vide SEBI (Portfolio Managers) (Amendment) Rules, 2002 which provides for return based fee also. The said clause originally came into force with effect from 7-1-1993, a date of publication in the Official Gazette, whereby the SEBI provided for the fee relating to the portfolio managers vide para 3(a) which has come into effect w.e.f. 11-10-2002. The Securities & Exchange....
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....es as part of the purchase cost of the securities during the given period. Automatically these fees are taken into account for computing capital gains or the carrying cost of unsold investments. There is a direct and proximate nexus between the fees paid and the process of acquisition and sale of the securities which is a causative factor for making capital gains and that the fees are paid wholly and exclusively for earning the income offered to tax under the head capital gains. Reliance is placed on the decision in the case of CIT v. Shakuntala Kantilal [1991] 58 Taxman 106/190 ITR 56 (Bom.) where it was held that amount paid for removing an encumbrance was allowable under section 48(i). In coming to this view the Court observed that without this payment the sale could not have been materialized and hence there would have been no question of the capital gains being brought to tax. In the present case the capital gains have arisen as a result of the efforts of the PM for which the fees have been paid. A Mumbai Bench of the Tribunal in the case of Davendra Kothari (136 TTJ 188) has confirmed disallowance of PMS fees while computing capital gains. In that case fees were p....
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....h had a direct nexus with the purchase or sale of the shares instead of allowing itself to be persuaded merely by the difficulty in allocating such fees to purchases by a directly conceivable basis In the present case before You Honours the annual termination fee is to be determined with reference to the NAV of the portfolio which has been defined to been the market value of the Securities as on the relevant date. No fees were paid on interest accrued and dividend received. It is further submitted that the Act does not define the expressions 'cost of acquisition' or 'cost of improvement' referred to in section 48. These expressions thus have to be given their natural commercial meaning as men of trade and commerce would unmistakably understand. Investments in securities are valued at cost by the appellant. In view of the direct nexus between the fees and the role of the PM established by us it is not difficult to appreciate that such fees form part of the cost of acquisition of the portfolio The SC in the case of Bharat Earth Movers (245 ITR 428)(SC) in the context of allowability of provision for leave encashment referred to the following passage from its decision in the ....
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....unting practice. The Hon'ble Pune Tribunal in case of S. Balan (308 ITR 151 (T PUNE) held that interest paid on monies borrowed for acquisition of shares would form part of cost of acquisition. Undoubtedly loading interest on individual transaction of purchase would necessarily involve an exercise of a location which did not deter the Pune Tribunal from upholding the claim. The Hon'ble Pune Tribunal observed that Interest having nexus with the cost of acquisition has to be taken into account for the purpose of computation of capital gains prescribed under section 48 (ii). The Hon'ble Bench inter alia referred to the decision of the Hon'ble Delhi High Court in the case of Mithilesh Kumari reported in 92 ITR 7 and the observation of Their Lordships that- it will not make any difference whether the interest was paid on the date of purchase or whether it is paid subsequently to exclude the interest amount from the actual cost would lead to anomalous results In the case of Challapalli Sugars Ltd. (98 ITR 167) the Supreme Court held that interest paid on borrowed money for purchasing plant and machinery before commencement of production would form the part of actual cost for ....
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....o investment is not the business activity but it is an investment activity & relevant gains are taxable under the head 'Capital gains' as accounted by the assessee. It is so held in the own case of the assessee vide 499 & 500/P/2008 and the same affirmed by a decision of the Tribunal-Mumbai Bench vide I.T.A No. 5382 Mum/2009 dated 30th November, 2010 in the case of Radha Birju Patel. Thus, it is the settled position at the level of the Tribunal that the Portfolio management activity is an investment activity and neither the business activity nor the activity amounting to 'an adventure in the nature of trade'. Therefore, the securities in question are held to be the investments by the Tribunal in the first round and consequently, when such securities are transferred by way of sale, the resultant gains have to be dealt with as per the provisions of section 48 of the Act. 34. The provisions of section 48 of the Act have already been analysed in the preceding paragraphs in the light of the explaining by the jurisdictional High Court in the case of Smt. Shankuntala Kantilal (supra). It is a settled issue now at the level of the jurisdictional High Court in the case of Smt. Shankuntal....
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....f acquisition and transfer of the investment of the securities. Consequently, adjudication of the issue of allowability of the said expenditure under clauses (i) or (ii) of section 48 of the Act is merely an academic exercise. Therefore, considering the fact there is no such specific issue raised before us in the grounds, we refrain from entering into that zone in this order. It is also relevant to mentioned that the on facts, the expenditure is for the twin purpose of acquisition and sale of the securities and hence, it cannot be held the whole of the impugned expenditure is spent for transfer of asset or it should be loaded to the cost of the securities. 36. Non-allocability of the Expenditure: It is an agreed position between the parties the payment of the Portfolio management fee was paid to M/s. ENAM and others and the same is in accordance with the contents of the bilateral agreement. The services rendered by M/s. ENAM are also undoubted. The twin services relating to the said portfolio management include (i) acquisition of securities for the assessee-client and (ii) sale of the said securities for the assessee-client. The payment of fee is undisputedly unspecific to the i....
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....et/share? Thus, in our opinion, the expression 'transfer' involves various sub-components and the first sub-component must of purchase and possession of the impugned securities. Unless the assessee is in possession of the asset, he cannot transfer the same. Therefore, the expression 'expenditure incurred wholly and exclusively in connection with 'such transfer' read with 'as a result of the transfer of the capital asset' mentioned in section 48 and 48(i) of the Act must necessarily encompasses the transfer involved in the stage of acquisition of the securities till the stage of transfer involved in the step of sale of the impugned securities. Such an interpretation of section 48 of the Act is the necessity here to avoid the likely absurdity. 38. In the peculiar circumstances of the present case, in our considered opinion the claim of the must not be rejected for want of the express provisions in section 48 of the Act and such an interpretation goes with the spirit of the judgment of the Jurisdictional High Court in the case of Smt. Shankuntala Kantilal (supra). Further, as per the principles of accounting i.e. AS-13, as discussed above, the expenditure of this kind is allowed to....