DCIT v KRA Holding & Trading Pvt. Ltd. (ITA NO. 240/PN/2011) [ITAT Pune]

Background:

The assessee during the year under consideration had claimed an amount of Rs. 2,11,95,334 as portfolio management fees paid to the portfolio managers. The same was made in terms of investment management agreement made on 01-01-2005. During the course of assessment proceedings, the AO was not convinced with the explanation given by the assessee and noted that similar issue was decided against the assessee for assessment year 2004-05 to 2006-07 wherein the payments has been disallowed and added back to the business income of the assessee. Therefore, he disallowed the payment treating the same as termination fees computed on profit sharing basis and not specifically provided in the agreement and not as per SEBI rules and regulations.

The CIT(A) observed that the assessee has not shown the fees paid to the portfolio managers as an expenditure in the P&L account. The same has been loaded on the purchase price of shares, which are either sold or carried forward to next year and concluded that these expenses are not allowable under either of the heads for the reason that they are against the guidelines of the SEBI and are also not allowable under the head ‘capital gains’.

Assessee’s contention:

Tribunal in assessee’s own case vide ITA No. 500/PN/2008 for assessment year 2004-05 has decided the issue and allowed the claim of portfolio management fees.

Earlier order of Tribunal of assessee’s own case:

Relevant extracts have been reproduced as under:

• Hon’ble Jurisdictional High Court in the case of CIT v Shakuntala Kantilal 190 ITR 56 (Bom) held that “such type of payments are deductible in two ways, one by taking full value of consideration ie net of such payments or deducting the same as expenditure incurred wholly and exclusively in connection with the transfer.”
• 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 of the asset.
• 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 transfer and the Onus is on the assessee to demonstrate the said linkage between the expenditure and the asset’s transfer.
• We have discussed in the preceding paragraphs that the profits earned by the assessee is chargeable to tax under the head ‘capital gains’
• Present case of the appellant is clearly distinguishable from the Mumbai Bench of the Tribunal in the case of DAVENDRA KOTHARI(136 TTJ 188)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.
• The annual termination fee is to be determined with reference to the NAV of the portfolio which has been defined to be the market value of the Securities as on the relevant date.
• 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.
• 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 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.
• As per the principles of accounting ie AS-13, the expenditure of this kind is allowed to be loaded to the cost of acquisition of the securities. Therefore, in principle, the claim of the assessee is allowable under the provisions of section 48 of the Act

Revenue’s contentions:

As per the decision of the Mumbai Bench of the Tribunal in the case of Homi K. Bhabha Vs. ITO [ITA No.3287/Mum/2009] 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 (for AY 2004-05) was not followed by the Mumbai Bench in the above cited decision.

HELD:

It is the settled proposition of law that when two view are possible on the same issue the view which is favourable to the assessee has to be followed (CIT vs. Vegetable Products 88 ITR 192 (SC)). Further, as the Tribunal in the assessee’s own case has already taken a view in favour of the assessee, that has to be followed unless it is reversed by a higher court.