TaxTMI 
TaxTMI 
2016 (5) TMI 155
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....m capital gain. Your appellant pray that the same be deleted." 3. The Brief facts of the case are that the assessee is an individual and director in M/s Marine Container Services India Pvt. Ltd. It was observed by the A.O. that the assessee has disclosed short term capital gains of Rs. 1,99,003/-. The assessee has also claimed long term capital gains of Rs. 72,94,563/- as exempt income u/s 10(35) of the Income Tax Act, 1961(hereinafter called "the Act") besides dividend income of Rs. 1,99,54,691/- and interest of Rs. 96,050/- received from relief bonds. During the course of assessment proceedings u/s. 143(3) read with Section 143(2) of the Act, it was observed by the learned assessing officer (hereinafter called "the AO") from the details filed by the assessee that the assessee has earned gains of Rs. 92,17,544/- arising out of PMS accounts held with various funds, out of which Rs. 23,56,127/- was earned from short term capital gains . The A.O. further observed that assessee has , inter-alia, claimed to have incurred an expenditure of Rs. 22,64,272/- for earning the short term capital gains arising out of the PMS account and claimed the same as deduction from the net sh....
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....capital gains and long term capital gains and then in the ratio of sales which were 45% of purchases and the ratio was applied to sale of shares leading to earning of short term capital gain to arrive at PMS expenses attributable there-to , which PMS expenditure comes to Rs. 5,75,136/- relatable to short term capital gains and 45% thereof being sale to purchase ratio , in relation to short term capital gains on sale of shares , PMS expenses comes to Rs. 2,59,879/- which were was allowed by the CIT(A) and rest of PMS expenses were disallowed by the CIT(A) whereby the CIT(A) held that the management expenses incurred for sale of shares leading to earning of short term capital gain are deductible from the full value of consideration as expenditure incurred wholly and exclusively in connection with such transfer as provided in section 48(i) of the Act. The CIT(A) thus allowed the expenses to the extent of Rs. 2,59,879/- and disallowance of the rest of the amount i.e. Rs. 20,04,393/- was confirmed , based upon the ratio of sales to total purchase and sale being 45% , and the same being applied to sale of shares leading to earning of short term capital gains , vide orders dated 19-08-201....
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....ying on judgment of CIT v. Vegetable Products (1973)88 ITR 192(SC). The assessee also relied upon judgment's of Hon'ble Bombay High Court in the case of CIT v. Shakuntala Kantilal (1991) 190 ITR 56(Bom.HC) and CIT v. Abrar Ali (2001)247 ITR 312(Bom HC.) and judgment of Hon'ble Kerala High Court in the case of V A Vasumathi v. CIT (2001) 123 ITR 94(Ker.HC). The assessee counsel also relied upon amended clause 3 vide SEBI (Portfolio Managers) (Amendment) Rules, 2002 whereby clause 3(a) provides that the portfolio manager shall charge an agreed fee from the clients for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly , any return and the fee so charged may be a fixed fee or a return based fee or a combination of both. Thus, the assessee's counsel submitted that portfolio manager only buys and sell shares on behalf of the assessee and these expenses are only related to activity of buying and selling shares and no other activity whatsoever. 8. The ld. D.R., on the other hand, relied upon the orders of authorities below. 9. We have considered the rival contentions and also perused the material available on record including case....
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....t of any improvement thereto. With the above background, we have to see whether the portfolio management charges of Rs. 22,64,272/- paid by the assessee can be allowed as deduction from the full value of consideration received or accruing to the assesse as a result of transfer of the capital asset being shares , provided the said PMS charges are either expenditure incurred wholly and exclusively in connection with the transfer of shares or PMS charges is a cost of acquisition or the cost of any improvement thereto of the capital asset being shares as per mandate of Section 48 of the Act. The assessee to support his contentions has relied on the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Rules, 2002 to contend that these PMS charges are allowable expenditure as the portfolio managers are allowed to be paid fee on 'return based fee' meaning thereby that it is an expenditure incurred wholly and exclusively in connection with the transfer of shares as these PMS charges are connected with sale and purchase of shares . Before we proceed further to decide whether PMS charges paid by the assessee is allowable as deduction as per provisions of Section 48 o....
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.... of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be;] " Under Clause 14 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 , it is stipulated as to contract which portfolio manager is required to enter with client and disclosures to be made as under:- "[14. Contract with clients and disclosures.-(1) (a) The portfolio manager shall, before taking up an assignment of management of funds or portfolio of securities on behalf of a client, enter into an agreement in writing with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligations relating to management of funds or portfolio of securities containing the details as specified in Schedule IV. (b) The agreement between the portfolio manager and the client shall, inter alia, contain: (i) the investment objectives and the services to be provided; (ii) areas of investment and restrictions, if any, imposed by the client with regard to the investment in a particular company or ind....
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.... 1934 (2 of 1934).] (3) The portfolio manager shall transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934 (2 of 1934). (4) The portfolio manager shall not derive any direct or indirect benefit out of the client's funds or securities. [(4A) The portfolio manager shall not borrow funds or securities on behalf of the client.] [(5) The portfolio manager shall not lend securities held on behalf of clients to a third person except as provided under these regulations.] (6) The portfolio manager shall ensure proper and timely handling of complaints from his clients and take appropriate action immediately". These Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 were amended from time to time and the relevant amendments so far concerning issue's under this appeal are reproduced below : " These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Amendment) Regulations, 2006. ******* 3. In the Securities and Exchange Board of India (Por....
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....e client meaning thereby that the portfolio managers does not act merely as a stock-broker to buy and sell shares of the clients in execution of the instructions of the client's for a brokerage/commission , but portfolio manager renders a vast spectrum of activities which involves giving advises to clients and/or management and administration of securities or fund portfolio's of the client which is managed by experienced, specialized, skilled and qualified professionals who act as portfolio managers to render their expertise, skill and specialized knowledge to the investor's client for a fee with an objective to create wealth for the investor client's and maximizing gains for these investors client. The highly specialized and skill services are rendered by these qualified and experienced portfolio managers on continuous basis to clients in a highly volatile and complex securities market with an objective of wealth creation and maximizing gains for the investor's clients and are not rendering merely services connected with the transfer of shares nor are they connected with cost of acquisition or sale of shares even if these PMS charges are paid based and calculated on purchases and ....
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....e different heads and the income chargeable to tax under these heads has to be computed as per the relevant provisions applicable to respective heads of income section 45 to section 55A falling under Chapter IV-E deal with assessment of income under the head 'capital gains' and section 48 in particular prescribes the mode of computation of capital gains. 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. 13. In the present case, the deduction on account of fees paid for PMS has been claimed by the assessee as deduction in computing capital gains arising from sale of shares and securities. He however has 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 a....
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....Counsel for the assessee has raised an alternative contention in support of the assessee's claim for deduction on account of fees paid for PMS in computing the capital gains relying on the theory of real income and the rule of diversion of income by an overriding title. He has contended that the fees for PMS being contractual liability directly relatable to the capital gains, there was a diversion of income from capital gain by an overriding title to the extent of the amount of such fees and the same therefore was not the income belonging to the assessee which was chargeable to tax under the head "capital gains". In this regard, we may observe that even though the assessee was under an obligation to pay the fees for PMS, the mere existence of such obligation to pay the said amount was not enough for the application of the rule of diversion of income by an overriding title. The true test for applicability of the said rule is whether such obligation is in the nature of a charge on source i.e. the profit earning apparatus itself and only in such cases where the source of earning income is charged by an overriding title, the same can be considered as diversion of income by an overr....
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....'ble Supreme Court in the similar context that what is not permissible in law as deduction under any of the heads cannot be allowed as a deduction on the principle of real income theory. 19. For the reasons given above, we find no merit in the arguments raised by the Ld. Counsel for the assessee in support of the assessee's case on the issue under consideration and rejecting the same, we hold that the fees paid by the assessee for PMS was not deductible in computing the capital gains as rightly held by the Assessing Officer The impugned order of the Ld. CIT(A) confirming the disallowance made by the Assessing Officer on this issue is therefore upheld dismissing this appeal filed by the Assessee. 20. In the result, the assessee's appeal is dismissed" The assesseee has placed reliance on decision's of Pune benches of the Tribunal including in the case of KRA Holding and Trading Private Limited (supra) which is distinguished by the Mumbai Tribunal in the case of Pradeep Kumar Harlalka(supra ) as under:- "13. Coming to the decision of Pune Bench of the Tribunal in the case of KRA Holding & Trading (P.) Ltd. (supra), after perusing the judgment ....
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.... the assessment year 2008-09 is dismissed. ITA No. 7439/Mum/2011 the for assessment year 2008-09 (Revenue's appeal) 11. This appeal filed by the Revenue is disposed of because the tax effect in the appeal is less than Rs. 10 lacs as per the latest CBDT Circular No. 21/2015, F. No. 279/Misc.142/2007-ITJ (Pt) dated 10th December, 2015 issued by Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India. 12. The ld. D.R. submitted that tax effect involved in this appeal is less than Rs. 10 lacs and the CBDT Circular No. 21/2015 is applicable to this appeal and the appeal is not maintainable/not pressed in terms of CBDT circular no 21/2015 dated 10/12/2015. The ld. DR submitted that as per the latest CBDT Circular No. 21/2015, F. No. 279/Misc.142/2007-ITJ (Pt) dated 10th December, 2015 issued by Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, no appeal shall be filed by the Revenue in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3 of the circular. Para 3 of the Circular No. 21/2015 S No. Appeals in Income tax matters ....