TaxTMI 
TaxTMI 
2012 (8) TMI 1032
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.... mutual funds. The assessee during the year has transacted in securities through Enam Asset Management Company Pvt. Ltd. The AO asked the assessee to furnish details in respect of the same. From the various details furnished by the assessee the AO noted that the assessee during the year had agreement with two PMS providers for purchase and sale of securities including derivatives. 2.1 He noted that the agreement with PMS clearly starts with assessee appointing the PMS, i.e. portfolio management service provider as his agent to carry all the transactions in his behalf, Eg. The Clause 2 of the agreement with Enam Asset Management Company Ltd. reads as under : 2.01 The client hereby appoints the Portfolio Manager for the purpose of investing the funds of the client and managing the clients portfolio of securities on the terms and conditions herein contained. 2.02 As the client's portfolio manager, the Portfolio Manager shall act in a fiduciary capacity and as a trustee and agent of the client's account. 3. After considering the various arguments advanced by the assessee and considering the frequency, volume, period of holding of the shares, organised activity of the assess....
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.... a. Profit upto 15% - NIL b. Profit above 15% - 80.20 The above arrangement clearly shows the business intention of the assessee in carrying out the share trading activity through PMS provider. 8.6 The entire transactions are handled by PMS providers care carried out in a thorough professional manner. The organised and systematic approaches to transactions by PMS providers clearly show intention to maximise the profits by increasing the turnover rather than to make money by earning dividends by holding the shares long enough. 8.7 Since the PMS providers act as agent to the assessee hence the way they conduct the business directly indicates the intentions of the assessee too. 8.8 The volume of transactions and the diverse nature of portfolio are also indicative of the business intentions. Alternatively speaking, if the assessee has to maintain the set up similar to that of the PMS provider then he would have to engage experts to analyse the market situation and future prospects. In such a case the assessee's activities would no doubt be considered as business activity. By engaging a portfolio management service pro....
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....ould have been treated as capital gain. The AO also disallowed an amount of Rs. 5,79,460/- u/s.14A being expenses relatable to earning dividend income. 4. In appeal the learned CIT(A) following the decision of the Jurisdictional High Court in the case of Gopal Purohit reported in 228 CTR 582 (Mumbai) and various other decisions relied on by the assessee before him treated the income from purchase and sale of shares through PMS as income from Short term and Long term capital gain. So far as the disallowance u/s.14A is concerned he held that no such disallowance is called for u/s.14A r.w.rule 8D in view of decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. He however held that since the income is treated as long term capital gain & short term capital gain, the assessee is not entitled to deduction of the PMS fees of Rs. 28,31,619/- and NDSL charges of Rs. 9,60,192/-. 4.1 Aggrieved with such order of the CIT(A) the revenue is in appeal before us with the following grounds : "1. The order of the learned Commissioner of Income Tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The learned Commissione....
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....nd the PMS provider in addition to payment of fees. Such arrangements of agency and profit-sharing are alien to a transaction in the nature of investment. 8. The learned Commissioner of Income Tax (Appeals) grossly erred in failing to appreciate that even if it is assumed, without conceding, that the assessee did not participate in the day to day affairs of transactions which were allegedly taken care of by the PMS provider, the same by itself would not make the assessee an investor vis-a-vis the impugned transactions in as much as the assessee had consciously deployed funds with the PMS provider for maximising profit and had also consciously delegated the function of churning the said funds to the PMS provider much as a contractor delegates a part of his work to a sub-contractor. In the latter instance, it cannot be said that the delegator ceased to be in business vis-a-vis the portion of work so delegated. 9. The learned Commissioner of Income Tax (Appeals) grossly erred in failing to appreciate that if the motive of the assessee were to invest and not to trade in shares, he would not have given a blanket mandate to the PMS provider for buying and selling shares....
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....th transfer and therefore, the claim was allowable. 3. Without prejudice to the above grounds, the learned CIT(A) erred in not appreciating that the amount paid to PMS providers ought to have been reduced from the sale consideration while computing capital gains. 4. The respondent craves leave to add, alter, amend, or delete any of the above cross objections". 4.4 After hearing both the sides, the additional grounds filed by the revenue are admitted for adjudication. 5. The first issue raised in the grounds by the revenue relates to the order of the CIT(A) in treating the profit from purchase and sale of shares as Short term capital gain and Long term capital gain as against Business income treated by the AO. 6. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find under identical facts & circumstances the Pune Bench of the Tribunal in the case of DCIT Vs. KRA holding and Trading Pvt. Ltd. (wherein both of us are parties) vide ITA No. 356/PN/2011 order dated 25-07-....
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....elates to the order of the CIT(A) in deleting the disallowance made by the AO u/s.14A read with Rule 8D other and holding that PMS fees & NSDL charges as not an allowable expenditure from capital gain. 8. After hearing both the sides we find the AO noted that the assessee has earned dividend from the activities of share transactions in personal account from PMS and from mutual funds investment. The total dividend received during the year and claimed exempt was Rs. 6,36,975/-. Similarly, the assessee has claimed the profit on long term capital gain on mutual funds at Rs. 1,92,21,750/- as exempt u/s.10(38) of the Income Tax Act. The AO disallowed an amount of Rs. 5,79,460/- being 0.5% of the average investment u/s.14A read with Rule 8D as expenditure for earning dividend income which is exempt from tax. 9. In appeal the learned CIT(A) deleted such disallowance made u/s.14A r.w. Rule 8D of the I.T. Rules on the ground that Rule 8D is not applicable for A.Y. 2007-08 in view of decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. (328 ITR 81). He however held that payment of fees to PMS providers and NSDL charges amounting to Rs. 28,31,619/- and Rs. 9,60,19....
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.... in the said decision has not considered the decision of Hon'ble Bombay High Court in the case of CIT Vs. Solapur District Milk Producers and Process Unit Ltd. reported in 315 ITR 304. He submitted that the decision of the Pune Bench of the Tribunal in the case of KRA Holding & Trading (P) Ltd. has to be followed and the fees paid to the PMS provider has to be allowed as an expenditure from the short term capital gain or long term capital gain. 10. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the various decisions cited before us. So far as the deletion of addition made by the AO u/s.14A r.w.Rule 8D of the I.T. Rules we find the assessment year involved in the impugned appeal is assessment year 2007-08. Therefore, provisions of Rule 8D are not applicable to the impugned assessment years since the same is applicable from assessment year 2008-09 and onwards as held by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (Supra). We further find the submission of the learned counsel for the assessee before the CIT(A) that no borrowed funds have been utilised and no interest has been paid for obtainin....
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....laneous receipts such as dividends and interest. As per the assessee, there are other decisions to support the claim of the assessee. Further, assessee's stand is that revenue authorities have listed three reasons cumulatively for denial of deduction ie not as per the agreement; (ii) not authorized by the SEBI Regulations, 1993 and therefore it attracts the provisions of the Explanation to sub-section (1) of section 37 ie infringements of the law, and the said reasons do not stand the test of legal scrutiny as the IT authorities misinterpreted the facts. In this regard, the facts are that the fee paid to assessee as per the agreement ie at the expiry of the agreement period and expiry of the agreement is different from the expiry the agreement. In the earlier case, the agreement does not expire and only the period expires. Secondly, regarding the allegation of SEBI Regulations, assessee's stand is that the said clause 14(3) has been amended to include the payment of fee on 'profits sharing basis' too. Therefore, there is not infringement of the said clause and consequently, the invoking by the CIT(A) of the provisions of Explanation to section 37(1) of the Act doe....
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....irness to Dr Balasubramanian for the Revenue that he did not dispute the fact of payment or even the necessity of making such a payment. His contention is that the language in which section 48 is couched does not contemplate deduction of such an amount. Reference in this regard was made to section 48 of the Act to show that the payment herein could be neither be termed as expenditure incurred wholly and exclusively for the transfer or the cost of acquisition or of any improvement thereto........ 6. In order to appreciate DR ...... submission, it is desirable to refer to the provisions of section 48 which read as under:............ The section (section 48) broadly contemplates three amounts for the purpose of computing income chargeable under the head "Capital gains". The first is the full value of the consideration for which the capital asset has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. We have already referred to the facts of the case in detail earlier. It cannot be disput....
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....set in that case. 24. We have also perused some of the other citations relied upon by the parties to draw the boundary lines for the kind of expenditure which fall within the scope of the allowable expenditure u/s 48 of the act in computation of the capital gains. We find that all these citations invariably followed the jurisdictional high court judgment in the case of Santhilal Kantilal (supra). A. Calcutta High Court held in the case of Gopeenath Paul and sons & Anr (278 ITR 240) that "when assets of the assessee GNP, earlier carrying on business in the name of GSM could not be sold as going concern under orders of Court without meeting the liabilities of GSM towards the Bank, payments for meeting such liabilities of GSM towards bank was expenditure incurred wholly and exclusively in connection with the transfer, hence deductible u/s 48(i) of the Act." B. AAR held in the case of Compagnie Financiere Hamon, In Re (310 ITR1), that the 'professional fee paid to the lawyers distinctly related to and integrally connected with the transfer of shares is admissible for deduction u/s 48(i) of the Act' AAR held that the what is attributable to the final act of tr....
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....the asset's transfer within the scope of the provisions of section 48 of the Act, the claim cannot be disallowed for want of the express provisions in section 48 of the Act. 26. Wholly and Exclusively: In this regard, it is a settled law that the expression 'wholly and exclusively' is explained for the purpose of the identical expressions used in section 37 of the Act. In the case of Sasoon j David & Co P Ltd v CIT 118 ITR 261(SC), Hon'ble Supreme Court explained the twin adverbs stating that the first adverb, 'wholly' refers to the quantum of the expenditure, the sum of money spent and the second adverb 'exclusively' has reference to the 'purpose' behind the expenditure and 'not the motive or object' of expenditure. 27. After explain the scope of section 48 of the Act, we shall now proceed to examine the facts of the case in general and the applicability of the provisions of section 48 in particular. 28. We have already detailed the facts of the impugned payments in the preceding paragraphs. To sum up the same, the undisputed facts are: (i) the assessee made the payment of fee to M/s Enam, the Asset Management Company and the genuineness of the said paym....
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.... client. These Regulations, 1993 provide that fee to be charged may be a fixed amount or a return based fee or a combination of both. We have extracted the amended clause 14(3) and the same is as follows. "(3)(a) : 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, in our opinion, the amended provisions allows the payment of fee to AMC on 'return based fee' and therefore, all the three reasons of the revenue for denying the claim of deduction in favour of the assessee, as discussed in the above paragraphs of this order, require to be rejected and in favour of the assessee.Capital gains vs Deductions 30. We have discussed in the preceding paragraphs that the profits earned by the assessee is chargeable to tax under the head 'capital gains'. It is so ordered by this Tribunal vide the order dt 31.8.2009 in connection with appeals ITA No 499/PN/08 in the case of ARA Trading & Investments P Ltd. and ITA No 500/PN/08 in the case of K....
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....et or the net value of the assets of the assessee as held either at the beginning or at the end of each quarter. At Para 8 of the Order, the Honourable Bench has observed that the CIT(A) held that the assessee was paying the fees as aforesaid to portfolio managers even on the interest/dividend received on the investments and therefore the CIT(A) came to hold that it could not be said that there was nexus between the PMS fees paid and purchase and sale of investments. The Honourable Mumbai Tribunal has laid stress on the said findings of the CITA. Present case of the appellant is clearly distinguishable in the light of the fact that return based fees is also payable in respect of profits earned on sale of investments and therefore the PMS fees has a direct nexus with the purchase and sale of investments during the year and fees is not paid on interest and dividend received by the appellant. It is respectfully submitted that the said decision is not applicable as it turns on its own facts apart from being patently wrong. The assessee in that KOTARI'S case had failed to demonstrate the nexus between the fees paid and the activity of purchas....
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.... estimation of the liability would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. In the present case merely because some mathematical exercise is involved in loading such fees to individual transactions of purchase would not mean that such fees do not form part of cost of acquisition or have nexus therewith Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that cost of an investment includes acquisition charges such as brokerage, fees and duties. The method of accounting followed by the company in respect of fees paid is to proportionately load these fees on the securities handled by the Portfolio Manager during the year [i.e. opening portfolio plus investments made during the year]. Automatically these fees are taken into account for computing capital gains or the carrying cost of unsold investments. The Supreme Court in the case of UP State Industrial Development Corporation (225 ITR 703) was dealing with the case of an underwriter of shares who had to subscribe to shares in ....
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..... In this case preoperative interest would have to be allocated to the cost of individual fixed assets acquired during construction period of a new company (this was before the block of assets concept was introduced) and yet the Court held so. By the same logic expenses incurred in relation to the portfolio should be allowed to be capitalized in terms of AS 13. It will be appreciated from the submissions made above that this is not so in the present case where a live nexus has been clearly established and on that basis even the accounts have been maintained; investments have been accounted for inclusive of proportionate fees and said fees are also loaded to unsold investments as at the year end. It is respectfully submitted that in the present case assessee has demonstrated how there is a nexus between the fees and the role of the PM directly affecting purchases and hence cost of acquisition." 32. From the above, it is evident that the unlike in the transactions involving acquisition and sale of the land buildings, the loading of the expenses ie fee paid to the AMC is done in accordance with the AS-13 ie cost of an investment includes ac....
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....urities should be allowed notwithstanding the inadequacy of the express provisions of section 48 of the Act. It is also binding on us to interpret the said provisions of section 48 that the same are read down by the Hon'ble High Court in that case and the same remains undisturbed till date. Consequently, the expenditure which is distinctly and directly connected to the transfer, which is interpreted to be of wider meaning and connotation, are required to be allowed. We also interpreted in the preceding paragraphs that the expression 'wholly and exclusively in connection with such transfer' as wider in scope and in our opinion, it is no so narrow to not to accommodate the 'portfolio fee', which is paid undisputedly and obviously for acquisition and sale of the securities/unit if any. Therefore, we are of opinion that the impugned expenditure is (i) directly connected to the asset and its transfer, (ii) it is genuinely incurred as accepted by the revenue; (iii) it is a bona fide payments made as per the norms of the 'arm's length principle' since the M/s Enam and the assessee are unrelated; (iv) necessity of incurring of expenditure is imminent and it is in the normal course of the i....
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....on of the asset, the expenditure ie fee paid the Enam, has to be asset-specific or share-specific per the provisions of section 48 of the Act. In our opinion, the same is absurd given the facts of the case where the portfolio investment attracts the provisions of section 48 of the Act and the asset involved is not land or building and in fact the assets involved are the securities/shares/mutual funds etc. In matters of transactions involving securities/shares/mutual funds etc, expenditure/fee paid to portfolio manager is never each share specific and in fact they are paid on volume based. Therefore, the revenue's argument has to be rejected on the ground of impracticability or non-existent in this line of investment activity alone. Considering the genuineness and essentiality of the payment of fee to the Portfolio manager ie ENAM and undisputedly for the predominantly for the said twin purposes of acquisition and sale of the securities, the claim has to be allowed. Further, it is an admitted fact that the bifurcation of expenditure is not possible in the given facts of the case and the payment is for composite services, wholly and exclusively in connection with transfer of the tran....
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....e provisions of section 48 of the Act. Hon'ble Supreme Court in the case of UP State Industrial Development Corporation (225 ITR 703) was dealing with the issue of loading of an underwriter commission to the cost of shares, held that the general principles of accounting have to be observed. Regarding the objections of the revenue regarding the quantification of the claims of expenditure, in our opinion, the judgments of the Supreme Court in the cases of Bharat Earth Movers Ltd (supra) and the Calcutta Co Ltd (supra) helps the assessee and therefore, the claim of the assessee is allowable. Accordingly, relevant ground relating to the second issue. 10. The above decision of the Tribunal was not available before the CIT(A) while adjudicating the issue. We find the revenue has gone on appeal against the order of the Tribunal on the issue of treatment of income from Portfolio Management Scheme as "Capital gain" or "Business income". The relevant order of the Hon'ble High Court in ITA No. 3482 of 2010 dated 19-07-2011 reads as under: "Heard. Admit on the following question of law :- "Whether on the facts and circumstances of the case, the ITAT was justified in ....