TaxTMI 
TaxTMI 
TaxTMI 
2012 (8) TMI 1032
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....he 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 assessee in purchase & sale of shares to maximise ....
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....hrough 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 provider the assessee has merely outsourced these activities to an agent to work on his behalf on payment basis. The payment is clearly related to the performance and motivated the PMS providers to trade frequently to book profits as and w....
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....ore 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 ₹ 28,31,619/- and NDSL charges of ₹ 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 Commissioner of Income Tax (Appeals) erred in allowing the assessee's appeal instead of confirming the Assessing Officer's order. 3. The learned Commissioner of Income Tax (Appeals) grossly erred in not appreciating that the gains of ₹ 1,17,49,017/- shown as Short Term Capital Gain and ₹ 48,20,515/- shown as Long Term Capital Gain was earned from trading in shares,....
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....aken 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 and, instead, would have reserved the right of decision in respect of such shares to himself. The absence of such reservation of right clearly proves the intent of the assessee to transact in shares with a view to booking profits. 10. The learned Commissioner of Income Tax (Appeals) grossly erred in deleting the disallowance made by the Assessing Officer made u/s.14A r.w. rule 8D merely by routinely refer....
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....udication. 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 25-07-2012 for assessment year 2007-08 has upheld the order of the CIT(A) wherein gain on sale of shares and mutual funds was held as Short term and Long term capital gain by the CIT(A). The relevant observation of the Tribunal at Para 5 of the order reads as under : "5. We have heard the rival arguments made by both the parties, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also gone through the decision of the Tribunal in assessee's own case.....
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.... claimed the profit on long term capital gain on mutual funds at ₹ 1,92,21,750/- as exempt u/s.10(38) of the Income Tax Act. The AO disallowed an amount of ₹ 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 ₹ 28,31,619/- and ₹ 9,60,192/- respectively are not allowable expenditure from such capital gain. While doing so the learned CIT(A) relied on the decision of the Mumbai Bench of the Tribunal in the case of Devendra Motilal Kothari Vs. DCIT reported in 50 DTR 369 (Mumbai). 9.1 Aggrieved with such order of the CIT(A) the revenue as well as the assessee are in appeal before us. 9.2 The learned DR heavily relied on the order of the AO regarding the disallowance of expenditure u/s.14A r.w. Rule 8D. So far as the disallowa....
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....th 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 obtaining such dividend income could not be controverted by the learned DR. Under these circumstances we find no infirmity in the order of the CIT(A) deleting the addition made by the AO u/s.14A r.w. Rule 8D. 10.1 So far as the fees paid to PMS providers as an allowable expenditure, we find the Pune Bench of the Tribunal in the case of KRA holding and Trading Pvt. Ltd. Vs DCIT vide ITA No. 240/PN/2011 order dated 25-07-2012 for assessment year 2007-08 (in which both of us are parties) has held the fees paid....
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....s 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 does not arise. 21. In the context of the above rival positions, we proceed to examine the scope of the provisions of section 48 of the Act, amended SEBI regulations in matters relating to fee payable to Portfolio managers, the matters relating to the distinguishing of the decisions cited by the revenue etc. A. Scope of the Provisions of section 48 of the Act: 22. Section 48 provides for the method of computation of capital gains. The relevant provisions read as follows: "The income chargeable under the head "Capital gains" shall be compute....
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....efer 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 disputed that unless the assessee had settled the dispute with Radia and Sons (P) Ltd., the sale transaction with M/s.Cosmos Co-op Housing Society Ltd. under the agreement dated March 30,1967, would not, rather could not, have materialized. If this transaction had not materialized there would perhaps have been no question of capital gains. The sale would then have taken place at the rate of ₹ 29 per sq. yard as against ₹ 51 per sq. yard. One way of looking at the problem could be to say that the full value of the consideration in this case was not the a....
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....ier 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 transfer of shares is admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. C. In the case of Bradford Trading co P Ltd, the Madras High court held that the "amount paid by the assessee to a third party to settle the pre existing claims against the transfer of the assets as also litigation expenses constituted expenditure incurred wholly and exclusively for transfer of capital asset and was deductible in computation of capital gains; the amount reimbursed by vendee to the....
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....ey 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 payment is undisputed; (ii) the revenue authorities have also not disputed the requirement or necessity of the said payments; (iii) quantitatively speaking in view of the adverbial expression, 'wholly' used in section 48(i) of the Act, we find that the payment of fee @ 5% only restricted to the NAV of the securities and not only the global turn over including the other income; (iv) regarding the purpose of payment in view of the adverbial expression, 'exclusively used in section 48(i) of the Act, we find that the same is intended only twin purpose of the acquisition of the securities and also for sale....
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....e 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 KRA Holding & Trading P. Ltd. Relevant para 27 of the said order was already extracted in the preceding paragraphs. In the light of the above undisturbed proposition, our attention is restricted to the limited issue of if the impugned fee paid to the M/s Enam is allowable u/s 48 of the Act or not. Loading of the expenditure to the cost of the shares, distinguishing of the Tribunal's order in the case of Devendra Kothari (supra): 31. Ld DR for the Revenue relied on the above decision of the Tribunal and mentioned that the order of the CIT(A) does not call for any interference despite the fact that the order is not considered the....
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....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 purchase and sale. The assessee could not explain how the fees paid on such explicit basis could be considered differently so as to constitute cost of either acquisition or as expenditure in connection with transfer. The assessee could not demonstrate how allocation of fees had been made. It could not furnish details of how or the basis on which allocation of said fees was possible. Further fees had to be paid even when no purchase or sale took place. The CIT(A) had held that it was not possible to break up the fees so as to hold that the same was relatable to purchase or sale of shares. Further, fees were paid even on interest accrued and dividend received. The Tribunal held that the basis on which fee....
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....d 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 the event of under subscription by the public. The issue before the SC was whether in respect of such devolved shares whether the underwriting commission received from the client, should be treated as an item of income or an item that would go to reduce the cost of acquisition of such devolved shares. The Supreme Court, applying the well accepted proposition that for the purposes of ascertaining profits and gains ordinary principles of commercial accounting should be applied so long as they are not in conflict with any express provision of the Act upheld the contention of the assessee which it found to be in consonance with the general principles of accountancy governing underwriting contracts. In the present case since the Department is not contending that the accounting practic....
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....n 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 acquisition charges such as brokerage, fees and duties. Further, once the liability to incur is certain the quantification does not bar the assessee from claiming the expenditure. The claim of the assessee must be allowed once the basis of quantification is scientific and reasonable. The method of accounting followed by the company consistently in respect of fees paid is to proportionately load these fees on the securities handled by Portfolio Manager during the year. FINDINGS OF THE TRIBUNAL 33. Thus, the issue for adjudication relates if the payment of fee paid to the portfolio manager ie Enam for the twin purposes of (i) purchase of investments/securities and (ii) sale of the same is an allowable deduction u/s 48 of the Act or not. The same has to be decided in the context of settlement of the disputes relating to correct head of income. ....
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....ed 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 investment activity; and (v) read down provisions of section 48 of the Act in view of the said ratio in the case of Shantilal Kantilal (supra) accommodate the claim of such expenditure legally. 35. Further, the decision of the Tribunal in the case of Devendra Kothari (supra), which was heavily relied upon by the Ld DR for the revenue unfortunately did not refer to the said 'read down' interpretation in the cited judgment of the jurisdictional High Court in the case of the Shantilal Kantilal (supra). In any case, we find the said order of the Tribunal is distinguishable on fact in general and the discharging of the onus of the assessee in demonstrating the direct linkage of the expenditure to the shares as well as the claim of fee on the entire turnover on global basis ie not restricted to investments only. As such, it is a settled issue that the expression 'in co....
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....aid 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 transfer of the securities. The expenditure is undisputedly for the twin purposes of acquisition of the securities and the sales of the same. The expenditure is arrived at on profits sharing basis, which is now allowable basis by the SEBI. The expenditure is composite one as it is for the both the purposes. There is no bifurcation either by the assessee or by the revenue. In our opinion, there is no requirement of bifurcation of the expenditure ie a segment to form part of the cost of acquisition and other segment relating to transfer of securities to reduce the profits as it is not the case of the revenue that it shall make some difference from the tax point of view. Therefore, we resist from entering into that controversy. 37. Next, we proceed to explain the expression 'such transfer' used in section 48 of the Act. The expression 'transfer is defined section 2(47) of the act an....
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....pital 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 holding that the income earned by the assessee by the portfolio management scheme was liable to be assessed under the head "capital gains" instead of being assessed under the head "profit &gains of business or profession"? Nothing was filed before us to substantiate that the Revenue has gone on appeal against the order of the Tribunal allowing the claim of Portfolio Management fees as an expenditure from such capital gains. "11. The decision of the Mumbai Bench of the Tribunal in the case of Homi K. Bhabha Vs. ITO was brought to our notice by the learned DR wherein it was held that Portfolio Management Scheme fees is not deductible against capital gains. The decision of the Pune Bench of the Tribunal in the case of KRA Holding & Trading was not followed by the Mumbai Bench in the above cited decision. The Mumbai Bench following other decisions of the coordinate Benches of the Tribunal declined to follow the decision....