TaxTMI 
TaxTMI 
2018 (7) TMI 931
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....ly in connection with the transfer. The PMS fees paid by the assessee is not incurred wholly and exclusively for the transfer of the securities but for the management of the entire portfolio and is paid in the capacity of owner of securities and not in the course of transaction of securities. 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored." 2. Briefly stated, the facts of the case are that the assessee had filed his return of income for A.Y. 2007-08, declaring total income of Rs. 1,65,76,355/-. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Act. 3. The issue involved in the present appeal lies in a narrow compass. The assessee had claimed deduction of Portfolio Management Fees (for short 'PMF') and Performance Linked Fees (for short 'PLF') amounting to Rs. 1,13,12,737/- as expenses incurred in connection with transfer of shares leading to 'Short term capital gain' (for short 'STCG') in his hands. The assessee justifying his cl....
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....that the expenditure must be incurred prior to passing of the title. The decisions of various High Courts in the cases of viz., Shakuntla Kantilal, (Bombay High Court) 190 ITR 56, Dr. P. Rajendran (Kerala High Court) 127 ITR 810, V.A. Vasumati (Kerala High Court) 123 ITR 94 and Compagnie financier Hamon (AAR) 310 ITR 1 support this proposition. That apart, the issue under consideration is presently covered in favour of the appellant by the decision of the Hon'ble ITAT, Pune Bench in the cases of M/s KRA Holding and Trading Pvt. Ltd and M.s ARA Trading and investments Pvt. Ltd. in appeal Nos. 1321 of 2002-03, 499 & 500 of 2004-05, 1320 & 1322 of 2005-06 and 434 & 806 of 2006-07. Having regard to the above, I am of the considered opinion that the PMS fees paid to the Port Folio Management is an allowable deduction. Accordingly, the addition made by the AO is deleted and the appellant gets relief." 5. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Departmental Representative (for short 'D.R.') at the very outset submitted that the CIT(A) had erred in allowing the PMF and PLF charges of Rs. 1,13,12,737/- as deduction ....
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....Pune (ITA No. 240/PN/2011, dated 25.07.2012) had after considering the order of the Tribunal in the case of Devendra Motilal Kothari (supra), taken a contrary view and had concluded that portfolio management fees was allowable as a deduction while computing the capital gain on transfer of shares. The ITAT, Pune Bench while concluding as hereinabove, had taken support of the judgment of the Hon'ble High Court of Bombay in the case of CIT Vs. Shakuntla Kantilal (1991)190 ITR 56 (Bom), wherein it was held that expenses incurred in connection with transfer of a capital asset was to be allowed as a deduction under Sec. 48 of the Act. Subsequently, the ITAT, Mumbai 'C' bench in the case of Pradeep Kumar Harlalka Vs. ACIT, Circle 12(3), Mumbai (2012) 143 TTJ 446 (Mum), observing that the judgment of the Hon'ble High Court of Bombay in the case of CIT vs. Roshan Babu Mohammed Hussein (2005) 275 ITR 231(Bom) had held its earlier judgment in the case Shakuntla Kantilal (supra) as no longer being the good law, thus followed the earlier view taken by the ITAT, Mumbai in the case of Devendra Motilal Kothari (supra) and held that the portfolio management fees was not to be allowed as a deduction....
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....rvices so rendered had agreed to pay to the portfolio manager a base fee viz. PMF of half percent (0.5%) of the total net asset value (market value of assets inclusive of all securities and cash balances) under management at the beginning of each quarter. Still further, as is discernible from the agreement between the assessee and his portfolio manager, the assessee was also to pay a performance linked return based fee calculated at the rate of 15% per annum of the profits in excess of 15% (benchmark) of the profits after deducting all the expenses including the fees payable to the portfolio manager for every completed year (12 months period from the date of joining) of service or any part thereof. We are thus of the considered view that from a perusal of the terms and conditions of the agreement between the assessee and his portfolio manager, it can safely be gathered that the PMF and PLF charges paid by the assessee to his portfolio manager are clearly in the nature of service charges for making investments of assesses fund and managing the portfolio of securities. We thus, are of the considered view that the aforesaid service charges can neither be construed as an expenditure in....
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....the Tribunal, while the assessee is in appeal for the disallowance by the CIT(A) of the rest of the PMS expenses of Rs. 20,04,393/- vide this appeal. It is an undisputed and admitted position between the rival parties that the assessee has earned capital gains on sale of shares held under Portfolio Management Services account of the assessee with ICICI Prudential Asset Management Company Limited and Otimix ING , which is managed by the Portfolio Managers for which portfolio management services fee of Rs. 22,64,272/- has been paid by the assessee to the portfolio managers , the income arising thereof from sale of shares is chargeable to tax under the head 'Capital Gains' , for which the income is to be assessed under Chapter IV-E of the Act as per the provisions of Section 45 to 55A of the Act. The provisions of Section 48 of the Act stipulates as under: "Section 48 [Mode of computation. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly....
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..../s.11(1) of SEBI Act,1992 that it shall be duty of the SEBI to protect the interests of investors in securities and to promote the development of, and regulate , the securities market , by such measures as it thinks fit. Section 11(2)(b) of SEBI Act,1992 provides , inter-alia, that such measures to achieve the objects of SEBI Act,1992 , the Board may require registering and regulating the working of portfolio managers. It is provided , inter-alia, in Chapter V u/s 12(1) of SEBI Act,1992 that no portfolio manager who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with , the conditions of certificate of registration obtained from the SEBI in accordance with the regulations made under the SEBI Act,1992. The SEBI Act,1992 by virtue of provisions of Section 30 grants the power to SEBI to make regulations by notification consistent with the SEBI Act,1992 and the rules made there-under to carry out purposes of the Act which is primarily investor protection and to promote the development of, and to regulate the securities market. In exercise of powers u/s. 30 of SEBI Act,1992, SEBI came out with regulations to regulate the bus....
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....ch service is rendered by the portfolio manager directly or indirectly (where such service is out sourced); (xii) custody of securities; (xiii) in case of a discretionary portfolio manager a condition that the liability of a client shall not exceed his investment with the portfolio manager; (xiv) the terms of accounts and audit and furnishing of the reports to the clients as per the provisions of these regulations; (xv) other terms of portfolio investment subject to these regulations." The portfolio managers general responsibilities are defined in clause 15 of the Securities and Exchange Board of India (Portfolio Managers) Regulation,1993 as under :- "15. General responsibilities of a Portfolio Manager.─(1) The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager shall manage the funds in accordance with the directions of the client. [(1A) The portfolio manager shall not accept from the client, funds or securities w....
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....ities market including in a portfolio manager, stock broker or as a fund manager." These Regulations may be called the Securities and Exchange Board of India (Portfolio Managers) (Second Amendment) Regulations, 2006. "c) after clause (c) the following clauses shall be inserted, namely: "(ca) "portfolio" means the total holdings of securities belonging to any person; (cb) "portfolio manager" means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf 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;" The perusal of SEBI Act,1992 and regulations made there-to clearly reveals that business of portfolio managers in India is a regulated and controlled business which requires mandatory registration with SEBI to carry on activities of portfolio management in India and is subject to continuous control, regulation and monitoring by SEBI with an objective of investor protection and promote and regulate securities market. The qualification and experience of the portfoli....
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....ot paid towards cost of acquisition of the capital assets or for improvement of the capital asset nor are these fees being expenditure incurred wholly and exclusively in connection with transfer of the capital asset and hence the same cannot be allowed as deduction u/s. 48 of the Act from the full value of consideration received or accruing to the assessee as a result of the transfer of the capital asset being shares. Our above view is fortified by the decision of jurisdictional Mumbai-tribunal in the case of Devendra Motilal Kothari v. DCIT in (2011) 13 taxman.com 15 (Mum.-trib.), Homi K Bhabha v. ITO (2011)14 taxmann.com 165(Mum-trib.) and Pradeep Kumar Harlalka v. ACIT (2011) 14 taxmann.com 42(Mum-trib.). The findings of the Mumbai-tribunal in the case of Devendra Motilal Kothari(supra) on identical issue are as under: "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 chargeable to tax under the head "capital gains" and this position is not in dispute. The only dispute is whether the fees paid by the assessee for PMS can be allow....
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....s 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 improvement of the said land. Similarly, in the case of Chemmancherry Estates Co. ( supra), funds borrowed by the assessee were utilized for acquis....
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....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 income by overriding title and the contentions raised by the assessee in this regard cannot be accepted being devoid of any ....
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.... case of Roshanbabu Mohd. Hussein Merchant (supra) and at placitum 18 it has been observed as under: "As regards the decisions of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 followed in the case of Abrar Alvi [2001] 247 ITR 312] and the decision of the Kerala High Court in the case of Smt. Thressiamma Abraham (No. 1) [2001] 227 ITR 802 which are strongly relied upon by the counsel for the assessee, we are of the opinion that the said decisions are no longer good law in the light of the subsequent decisions of the apex court referred to hereinabove." Thus, without going into further details we would only like to observe that the decision in the case of Smt. Shakuntala Kantilal (supra) is no more a good law in view of the latest decision and therefore that decision cannot be relied for the proposition that necessity of expenditure would make the same allowable." Thus, Respectfully following the afore-stated decision's of the co-ordinate jurisdictional Benches of the Mumbai Tribunal and our detailed discussions and reasoning in this order, we hold that these PMS expenses of Rs. 20,04,393/- paid to portfolio managers being managemen....