Before Shri R.S.Syal, AM and Shri V.Durga Rao, JM · 2018. 3. 25. · IN THE INCOME TAX APPELLATE...
Transcript of Before Shri R.S.Syal, AM and Shri V.Durga Rao, JM · 2018. 3. 25. · IN THE INCOME TAX APPELLATE...
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “H”, MUMBAI
Before Shri R.S.Syal, AM and Shri V.Durga Rao, JM
ITA No.3287/Mum/2009 : Asst.Year 2006-2007
Shri Homi K.Bhabha
49 Cuffe Parade
Colaba, Mumbai – 400 005.
PAN : AACPB8660M.
Vs.
The Income Tax Officer
(International Taxation) 3(1)
Mumbai.
(Appellant) (Respondent)
Appellant by : Shri Nitesh Joshi
Respondent by : Shri V.V.Shastri
Date of Hearing : 22.09.2011 Date of Pronouncement :28.09.2011
O R D E R
Per R.S.Syal, AM :
This appeal by the assessee is directed against the order passed by the ld.
CIT(A) on 31.03.2009 in relation to the assessment years 2006-2007.
2. Initially the assessee raised a solitary ground challenging the impugned
order in not allowing deduction of expenses incurred in connection with the
earning of short term capital gain. Subsequently revised grounds were filed reading
as under:-
“The learned Comm. Of Income tax (Appeals) – 10, Mumbai has erred:-
1. in not allowing the appellant a deduction for expenses incurred in
connection with earning of short term capital gains. He erred in not
appreciating the nature of these expenses.
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2. in not appreciating that the fees so incurred were a diversion of income by
overriding title and hence out to have been considered while computing
income.
3. in not appreciating that the full value of consideration received had to be
computed after deducting the fees which had been incurred and paid.
4. in not adjudicating that the fees paid were to be added to the cost of
acquisition / improvement of assets.”
3. The learned A.R. submitted that the ground taken in the original memo of
appeal has been repeated as such as revised ground no.1 and the ground nos. 2 to 4
are additional grounds which arise out of an articulation of ground no.1. No serious
objection was raised by the learned Departmental Representative against the
admission of additional grounds. We, therefore, admit these grounds and take up
the appeal for hearing.
4. Briefly stated the facts of the case are that the assessee declared gross long
term capital gain of Rs.67,32,921 and short term capital gain of Rs.91,87,735.
Thereafter a deduction was claimed in respect of professional fees / profit sharing
fees paid to ENAM Asset Management Co. Ltd. for rendering portfolio
management services and the net income from capital gains was determined as
under:-
Long term capital gain
Rs.67,32,921
Less:
Professional
Management fees
Profit sharing fees
Rs. 3,05,688
Rs.10,09,852
----------------
Rs.13,15,540
-----------------
Rs.54,17,381
==========
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Short term capital gain
Rs.91,87,735
Less :
Professional Management
fees
Profit sharing fees
Rs. 4,17,141
Rs.13,78,044
----------------
Rs.17,95,185
-----------------
Rs.73,92,550
==========
5. The Assessing Officer observed that the Professional Management fees and
Profit sharing fees (hereinafter collectively called as `fees’) paid to portfolio
manager was unrelated to any profit or loss under the head `Capital gains’. There is
no dispute on the fact that the assessee claimed long term capital gain as exempt,
which was duly accepted. The A.O. did not allow deduction for fees of
Rs.17,95,185 claimed by the assessee against the short term capital gain, as it was,
in his opinion, not related to the transactions resulting in to capital gain. It was
argued before the learned CIT(A) that the assessee was entitled to deduction on
account of fees against the short term capital gain, as it was directly related to sale
of shares and hence should be taken as expenditure incurred wholly and
exclusively in connection with transfer of shares. An alternative argument for
considering it as diversion of income by overriding title, was also raised. The
learned CIT(A) was unconvinced with the assessee’s submissions. He echoed the
assessment order on this point by holding that such charges could not be allowed
as deduction u/s 48. Now the assessee has assailed the impugned order in above
terms.
6. We have heard the rival submissions and perused the relevant material on
record. Both the sides have placed on record copies of the orders passed by the
Tribunal in support of their respective stands. The Mumbai Bench of the Tribunal
in the case of Devendra Motilal Kothari Vs. DCIT [(2011) 50 DTR 369 (Mum.)]
[to which one of us, namely, the ld. JM is party] decided the issue against the
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assessee by holding that the payment of fees by that assessee for portfolio
management services was neither diversion of income by overriding title nor cost
of acquisition nor cost of improvement and was consequently not eligible for
deduction in computing capital gain. Thereafter, similar issue came up before the
Pune Bench of the Tribunal in KRA Holding & Trading P. Ltd. in ITA
No.500/PN/08 etc., in which the Revenue relied on the Mumbai Bench order in
Devendra Motilal Kothari (supra). Vide its order dated May 2011 and after
considering the case of Devendra Motilal Kothari (supra), the Pune Bench
recorded a contrary view in assessee’s favour. In so deciding, the Pune Bench,
inter alia, relied on the judgement of the Hon’ble Bombay High Court in CIT Vs.
Shakuntala Kantilal [(1991) 190 ITR 56 (Bom.)]. Once again similar issue came up
before the Mumbai Bench of the Tribunal in Pradeep Kumar Harlalka Vs. ACIT in
ITA No.4501/Mum/2010. Vide its order dated 10.08.2011, the Mumbai Bench
considered both the earlier decisions on the point, viz., Devendra Motilal Kothari
(supra) and KRA Holding & Trading P. Ltd. (supra). Through an elaborate order,
the Mumbai Bench in latter case followed the decision in the case of Devendra
Motilal Kothari (supra) in priority over that of KRA Holding & Trading P. Ltd.
(supra). In deciding so, the latter Bench observed that the decision of the Pune
Bench in KRA Holding & Trading P. Ltd. is primarily based on the judgement of
the Hon’ble Bombay High Court in the case of Shakuntala Kantilal (supra),
which has been subsequently held to be not a good law by the Hon’ble Bombay
High Court in CIT Vs. Roshanbabu Mohammed Hussein Merchant [(2005) 275
ITR 231 (Bom.)]. As the later judgement overruling the earlier judgement was not
brought to the notice of the Pune Bench, the Mumbai Bench of the Tribunal in
Pradeep Kumar Harlalka (supra) chose to follow the decision in the case of
Devendra Motilal Kothari (supra), thereby deciding the issue against the assessee.
The position discussed above has been fairly admitted by both the sides.
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7. From the above discussion it is seen that the first order on this issue was
passed against the assessee in Devendra Motilal Kothari (supra). The second
order, in the point of time by the Pune Bench in KRA Holdings (supra), decided
the issue in favour of the assessee after considering the first order. Third order,
being the latest in the point of time in Pradeep Kumar Harlalka (supra), decided
the issue against the assessee after considering both the earlier orders. Not only
that, the third order also took note of the fact the basis of the Pune Bench order,
being the judgment of the Hon’ble jurisdictional High Court in Shakuntala Kantilal
(supra), already stood overruled by a subsequent judgment of the Hon’ble
Bombay High Court in CIT Vs. Roshanbabu Mohammed Hussein Merchant
(supra), which fact was not brought to the notice of the Bench. No other order, in
favour of the assessee, has been brought to our notice by the ld. AR. Accordingly
it is vivid that the majority opinion (in terms of the number of orders) on the issue
and also the latest order (in the point of time) together with the special
circumstances of the Pune Bench case (in considering an overruled judgment),
bring us to a stage where the current and the majority view taken by the tribunal so
far on the point, is against the assessee.
8. The learned Counsel for the assessee vehemently argued that certain
important aspects of the matter were not taken into consideration by the Mumbai
Benches of the Tribunal in both the cases in deciding the issue against the assessee.
It was argued that there was no basis for excluding fees paid by the assessee to his
portfolio manager from the computation of income under the head `Capital gains’
as there was no other purpose for its incurring, except in connection with the
purchase and sale of shares. Referring to agreement of the assessee with the
portfolio manager, ENAM Asset Management Co. Ltd., the learned A.R. explained
that the assessee agreed to place a sum of Rs.2.25 crore at the discretion of his
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portfolio manager, which was to be used for purchase and sale of securities etc.
Referring to various clauses about the consideration payable to the portfolio
manager, he stated that it was at half percent of the net asset value (market value of
assets inclusive of all Securities and cash balances) under management at the
beginning of each quarter and further the portfolio managers were entitled to a
return based fee calculated at the rate of 20% per annum of the profits in excess of
15% of the profits after deducting all the expenses. The sum and substance of his
submissions was that such fees paid by the assessee has direct relation with the
income arising from the transfer of shares and hence the same should be allowed as
deduction, either by considering it as diversion of income by overriding title from
the sale proceeds; or as part of the cost of acquisition of the shares; or alternatively
as an expenditure incurred wholly and exclusively in connection with the transfer
of shares. These aspects constitute three additional grounds stated to be articulation
of the main ground on disallowance of the amount of fees. He relied on certain
judgments to drive home his point of view on deductibility of the fees. In this
process, he also took us through the judgment of the Hon’ble Supreme Court in
CIT Vs. Sitaldas Tirathdas (1961) 41 ITR 367 (SC), which has been considered by
the Mumbai bench in Devendra Motilal Kothari (supra), to argue that the ratio
decidendi of this judgment was not properly understood by the Mumbai Bench
in holding that there was no diversion of income.
9. Sounding a contra note, the ld. DR stated that there was no infirmity in the
view taken by the authorities below as the fees had no direct relation with the
purchase or sale of shares and hence was liable to be excluded from consideration.
He vigorously accentuated on the orders passed by the Mumbai Benches and
contended that all the aspects now raised on behalf of the assessee, have been
already considered and decided against the assessee and there was nothing new to
justify going away from the earlier view.
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10. We are not inclined to accept the submissions tendered by the ld. AR that the
Mumbai Benches of the tribunal have not properly appreciated the matter in right
perspective in deciding the issue against the assessee. It can be easily noticed that
the facts and circumstances of the case in question and the two cases decided by
Mumbai Benches are similar. It is axiomatic that the nature of services provided by
any portfolio manager cannot be materially different, as has been fairly conceded
by the ld. AR during the course of hearing. It is further manifest that all the
contentions raised before us, being the treatment of fees as cost of acquisition of
shares; or expenses in connection with transfer of shares; or diversion of income by
overriding title, have been elaborately discussed in these two cases. After
considering all the aspects of the issue threadbare, the tribunal has held in both
these cases that the fees cannot form part of computation of capital gains u/s 48
and has to be ignored. It is the only issue in the present appeal and the facts are in
pari materia with those considered and decided by the Mumbai Benches.
11. The arguments advanced by the assessee on merits are an attempt to
persuade us for not following the aforenoted view taken against the assessee. We
are not impressed with this argument. Judicial discipline requires that when a
particular issue has been decided by a bench, then the subsequent co-ordinate
benches should normally follow the same. At the same time, we want to clarify that
there are no fetters on the powers of the subsequent benches to doubt the
correctness of the earlier order, if they are not convinced with it. Whereas
following the earlier decision is a rule, calling into question its correctness is only
an exception. Unless there are compelling reasons for not following the earlier
view, such as, if it is inconsistent with judgment of the Hon’ble Supreme Court or
that of the jurisdictional High Court or earlier decisions of the same rank; or if it is
sub silentio; or if it is rendered per incuriam in the sense that it is patently
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inconsistent with the statutory or settled legal position, the same should be
respected and adhered to by the subsequent benches so that consistency in the
approach of the tribunal is achieved. The above referred exceptions can be
classified into two categories. First, when there is a direct contrary judgment of
the Hon’ble Supreme court or that of the Hon’ble jurisdictional High Court on the
point, rendered prior to or after the earlier tribunal order, the later Bench would be
fully justified in differing from the earlier contrary view and following the higher
wisdom. Second, when the subsequent bench perceives earlier view to be
rendered per incuriam or sub silentio etc., the right course for it is to make a
reference to the President of the tribunal for constitution of a special bench on the
point so that the larger bench may consider whether the earlier view is correct or
the perception of the latter bench is correct.
12. Ordinarily neither the assessee nor the Revenue can be allowed to reargue
the same issue over and over again, when it has already been decided by a co-
ordinate bench of the tribunal. If such a course is allowed, then every single
repetitive issue would require reconsideration time and again because the aggrieved
party would always try to convince the later bench over its point of view.
Following the earlier order or making a reference to the special bench depends on
the satisfaction of the Bench about the correctness or otherwise of the earlier order
and not that on the view point of the aggrieved party. It is only when a subsequent
bench, on being seized of the matter, finds itself unable to endorse the earlier
view, either suo motu or on the arguments of the parties, that it may make reference
for the constitution of the special bench. The party dissatisfied with the earlier
view cannot compel the later bench to either take a contrary view or make a
reference for the constitution of the special bench. Thus it follows that once a
particular view is taken, the subsequent benches of the tribunal become functus
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officio on that issue, subject to the exceptions discussed supra. Needless to
mention at this juncture that the party unconvinced with the tribunal order is not
without remedy as the Act enshrines the provisions enabling it to appeal to the
Hon’ble High Court against the order and convince it about its stand.
13. We are reminded of the well known latin maxim `stare decisis’, which
means to stand by the things decided. It expresses the underlying basis of the
doctrine of precedent, which, in turn, means to abide by the former precedent when
the same points arises again in litigation. It has got the seal of approval from the
Hon’ble Supreme Court in several cases including Union of India VS. Azadi
Bachao Andolan (2003) 263 ITR 706 (726,727) (SC). The maxim stare decisis
provides that when a point of law has been decided, it takes the form of a precedent
which is to be followed subsequently and should not normally be departed from. A
decision which is followed for a long time will generally be followed, even though
the court before whom the matter arises afterwards, might be of different view.
14. Adverting to the facts of the present case, we find that the issue raised
before us has been predominantly decided in the above referred two cases against
the assessee after making thorough analysis of the issue, dealing with all the
aspects now raised by the ld. AR before us. These cases do not fall into the
exceptions, as discussed supra, justifying departure from the earlier view. We are,
therefore, not inclined to revisit all the relevant facts and the legal position on it
with a view to test the correctness of these orders. Respectfully following the rule
of precedent, we refuse to take a contrary view from that expressed by the Mumbai
Benches in the afore-noted cases. The disallowance is thus sustained and
resultantly the impugned order is upheld.
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15. In the result, the appeal stands dismissed.
Order pronounced in the open Court on this 28th
day of September, 2011.
Sd/-
Sd/-
(V.Durga Rao) (R.S.Syal)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai : 28th
September, 2011.
Devdas*
Copy to :
1. The Appellant.
2. The Respondent.
3. The CIT concerned
4. The CIT(A) - X, Mumbai.
5. The DR/ITAT, Mumbai.
6. Guard File.
TRUE COPY.
By Order
Assistant Registrar, ITAT, Mumbai.
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IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ‘C’ BENCH
BEFORE SHRI D.MANMOHAN, VICE PRESIDENT &
SHRI T.R.SOOD, ACCOUNTANT MEMBER
I.T.A.NO.4501/Mum/2010 – A.Y 2006-07
Pradeep Kumar Harlalka, 14 Thakur Niwas, 173, J.N.Tata Road, Churchgate, Mumbai 400 020. PAN: AAAAH 3461 N
Vs. Asst. Commissioner of I.T., Circle 12(3), Mumbai.
(Appellant) (Respondent)
Appellant by : Shri Divyesh I. Shah.
Respondent by : Shri Alexander Chandy, Sr. DR Date of Hearing: 19/07/2011 Date of Pronouncement:
O R D E R
Per T.R.SOOD, AM:
In this appeal various grounds have been raised but at the time
of hearing Ld. Counsel of the assessee submitted that the only
following four disputes are involved:
1. The Ld. CIT(A) erred in holding that loss arising out of transaction in
Futures and Options before 25/01/06 were in the nature of speculative transactions (arising out of ground No.1).
2. The Ld. CIT(A) erred in confirming the disallowance of i) Portfolio advisory fee of Rs.6,01,224/- &
ii) 50% of share transaction charges amounting to Rs.1,17,585/- (arising out of ground Nos.2 & 3)
3. The ld. CIT(A) erred in not allowing deduction u/s.80C amounting to Rs.30,000/-. (arising out of ground No.4)
2. Issue No.1: After hearing both the parties, we find that during
assessment proceedings AO noted that assessee had offered a sum of
Rs.3,27,687/- arising out of F&O transactions under the head ‘short
term capital gains’. AO observed that as per the provisions of
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sec.43[5][d] profit from transaction in F&O was assessable under the
head ‘business’ and not ‘capital gains’. He further observed that a sum
of Rs.1,35,889/- on account of loss related to the period before
25-01-2006 and the total gain after that date was Rs.4,63,577/-.
Therefore, AO subjected the amount of Rs.4,63,577/- under the head
business income and the loss amounting to Rs.1,35,889/- was allowed
to be carried forward as speculation loss. On appeal, action of the AO
has been confirmed by the ld. CIT(A).
3. Before us Ld. Counsel of the assessee submitted that this issue
is covered in favour of the assessee by the decision of the Tribunal in
the case of Gajendra Kumar T. Agarwal vs. ITO,
I.T.A.No.1798/Mum/10 [copy of the order filed] and by Circular
No.3/2006 dated 20-7-2006 wherein in the explanatory notes this
provision was explained.
4. On the other hand, Ld. DR relied on the order of the CIT(A).
5. After considering the rival submissions, we find that the issue
involved in the case of Gajendra Kumar T. Agarwal vs. ITO [supra] is
totally different. However, at the same time this issue is settled in
favour of the assessee because most of the Benches have taken a view
that the decision of the Special Bench of the Tribunal in the case of
Shree Capital Services Ltd. [121 ITD 498] holding that insertion of
clause [d] in sec.43[5] is applicable from A.Y 2006-07 and even loss
incurred before 25-1-06 should also be reckoned as only business loss.
Therefore, we set aside the order of the ld. CIT(A) and direct the AO to
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assess the net profit from F&O at Rs.3,27,687/- under the head
business.
6. Issue No.2: After hearing both the parties we find that assessee
had claimed a sum of Rs.2,35,170/- on account of transaction charges
under share trading expenses. AO noted that most of the transactions
were on account of F&O transactions and, therefore, 50% of such
amount was disallowed and the balance of 50% was disallowed. He
further found that assessee had claimed portfolio management fee
expenses amounting to Rs.6,01,224/- under the head short term
capital gains. The AO was of the view that no such expenditure is
allowable u/s.48 and therefore disallowed the same.
7. On appeal, ld. CIT(A) observed that as per sec.48 deduction
from capital gains would be allowed in a case where the expenditure is
incurred wholly or exclusively in connection with the transfer or for the
cost of acquisition or cost of improvement thereto. Since the
expenditure on account of portfolio management fee was in the nature
of revenue outgoing therefore could not be treated as cost of
acquisition of asset or improvement and since same had nothing to do
with the transfer, same was not allowable.
8. Before us, Ld. Counsel of the assessee submitted that share
transaction charges are charged by the brokers and therefore same
should have been allowed. However, he could not even given
bifurcation as to how much was in respect of F&O activity and how
much related to the investment. In respect of the issue regarding
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disallowance of portfolio management expenses, he mainly submitted
that this issue is squarely covered by the decision of the Pune Bench of
the Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT
[11 Taxman 250]. He argued that this decision has been rendered
even after considering the decision of the Mumbai Bench in the case of
Devendra Motilal Kothari vs. DCIT [136 TTJ 188] wherein it was held
that portfolio management fee is not allowable expenditure u/s.48.
This has been distinguished in the light of the decision of the Hon'ble
Bombay High Court in the case of CIT vs. Shakuntala Kantilal [190 ITR
56]. Therefore, the issue is covered by the latest decision of Pune
Bench in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT [supra].
9. In the alternative the claim for advisory fee and share
transaction should be allowed u/s.37[1] while computing the profits
and gains from the business and profession. He argued that portfolio
advisory fee could also be appropriately apportioned like the shares
transaction charges which have been apportioned by the AO @ 50% as
pertaining to the F&O transactions. This fee should also be apportioned
and allowed accordingly.
10. On the other hand, Ld. DR submitted that Pune Bench of the
Tribunal in the case of KRA Holding & Trading Pvt. Ltd. vs. DCIT
[supra] has used the expression “that expenditure incurred in
connection with the transfer of capital assets/securities should be
allowed notwithstanding inadequacy of the express provision of
slec.48”. This only shows that the expenditure was not allowable as
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per the provisions and the Tribunal has tried to rewrite the law. He
further submitted that in the detailed discussion by the Pune Bench,
ultimately the decision of Mumbai Bench in the case of Devendra
Motilal Kothari vs. DCIT [supra] where after detailed discussion
portfolio management service fee was held to be not allowable under
the head capital gains, was distinguished on the basis of the decision
of the Hon'ble Bombay High Court in the case of CIT vs. Shakuntala
Kantilal [supra]. However, the decision of Shakuntala Kantilal [supra]
came up for consideration later on before the Hon'ble Bombay High
Court in the case of CIT vs. Roshanbabu Mohd. Hussein Merchant [275
ITR 231]. He then referred to the judgment and pointed out that while
dealing with this decision at para-18 the Hon'ble High Court very
clearly held that the said decision is no longer a good law in the light of
the subsequent decision of the apex court. He pointed out that in the
decision in the case of KRA Holding & Trading Pvt. Ltd. [supra] the
Tribunal had decided the issue without noticing the latest decision of
the Hon'ble Bombay High Court and, therefore, the decision of KRA
Holding & Trading Pvt. Ltd. [supra] is also not a good law and should
not be followed and rather the decision of co-ordinate Bench in the
case of Devendra Motilal Kothari vs. DCIT [supra] should be followed.
11. He further submitted that portfolio advisory fee has nothing to
do with either cost of acquisition or even transfer of shares. The fee is
charged on percentage basis and even if shares are not transferred or
no fresh purchases are made even then such fee is chargeable. He
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submitted that the alternate contention of the Ld. Counsel that
portfolio charges should have been allowed u/s.37[1] is not
maintainable because no such contention was raised before the AO or
CIT(A) and in any case assessee has not produced any material before
the Tribunal to show that portfolio advisory fee related to the
transactions of F&O so as to be allowable under the head income from
business or profession. He submitted that as far as the expenditure on
share transaction is concerned, AO has already bifurcated the same at
50% relating to F&O transactions because this was claimed under the
head share trading expenses whereas portfolio fee has been claimed
under the head capital gains.
12. We have considered the rival submissions carefully in the light
of the material on record as well as decisions cited by the parties. The
Ld. Counsel of the assessee has not rebutted the argument of the Ld.
DR that portfolio advisory fee has been claimed under the head capital
gains, therefore, the alternate contention cannot be entertained and
further to examine the allowability we need to concentrate only on
sec.48 and the same cannot be allowed u/s.37 because only
expenditure incurred in relation to business and profession can be
considered u/s.37. Section 48 which is the computing section for
determination of capital gains reads as under:
Sec.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 and exclusively in connection with such
transfer;
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(ii) the cost of acquisition of the asset and the cost of any improvement
thereto:
From the above it is clear that while computing the capital gains only
two kinds of expenditure can be deducted from full value of
consideration, viz., [i] expenditure incurred wholly and exclusively in
connection with such transfer and [ii] the cost of acquisition or any
improvement thereto. The thrust of the argument of Ld. Counsel of the
assessee is that portfolio advisory fee would constitute an expenditure
which has been incurred in connection with the transfor, because
obviously it cannot be argued that such expenditure was in the nature
of cost of acquisition or improvement of the asset. The Ld. DR has
specifically contended that portfolio advisory fee has nothing to do with
the tranfer and such fee was payable even if no shares were
transferred or any purchase of shares were made. The Ld. Counsel of
the assessee did not rebut these arguments. No details have been filed
before us to show how this expenditure has direct nexus with the
purchase of shares or transfer of the shares. Therefore, this
expenditure cannot be called to be an expenditure which has been
incurred in connection with such transaction. We find that this aspect
was highlighted by the Mumbai Bench of the Tribunal in the case of
Devendra Motilal Kothari vs. DCIT [supra] while deciding the identical
issue against the assessee. The held column of the decision reads as
under:
“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
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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 and securities. On the other hand, the basis on which the said fees was paid by the assessee shows that it had no direct nexus with
the purchase and sale of shares and as rightly contended by the Departmental Representative, the said fees was payable by the assessee going by the basis thereof even without there being any
purchase or sale of shares in a particular period. As a matter of fact, when the CIT(A) required the assessee to allocate the fees paid for
PMS in relation to purchase and sale of shares as well as in relation to the shares held as investment on the last date of the previous year, the assessee could not furnish such details nor could he give any definite basis on which such allocation was possible. 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 s.48.”
13. Coming to the decision of Pune Bench of the Tribunal in the
case of KRA Holding & Trading Pvt. Ltd. [supra], after perusing the
judgment very carefully we find that in that decision the decision of co-
ordinate Bench of Mumbai Tribunal in the case of of Devendra Motilal
Kothari vs. DCIT [supra] was distinguished mainly on the basis of
decision of Hon'ble Bombay High Court in the case of CIT vs.
Shakuntala Kantilal [supra]. The Pune Bench referred to various paras
of Hon'ble Bombay High Court’s decision in para-22 and ultimately
concluded in para-23 that what was required was that the claim should
be bona fide and claim for such genuine expenditure has to be allowed
so long as incurring of the expenditure is a matter of fact and
necessity. However, as pointed out by the Ld. DR this decision was
specifically over ruled by the Hon'ble Bombay High Court in the case of
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ITA NO.4501/M/10 9
CIT vs. 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 vs. 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 CIT vs. 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.
14. We would also like to observe that income of an assessee has to
be charged in view of the five heads given under the I.T.Act. Each
head of income gives detailed procedure to determine the receipts as
well as out goings and only those items can be deducted which have
been specifically provided under the respective heads. This position
was made clear by the Hon'ble Supreme Court in the case of CIT vs.
Udayan Chinubhai And Ors. [222 ITR 456]. Again the Hon'ble Supreme
Court in the case of CIT vs. Dr. V. P. Gopinathan [248 ITR 449] where
the issue was whether interest paid by the assessee to the bank
against loan taken on FDR could be allowed against the interest
income, the apex court clearly held that such claim was not allowable
because interest that assessee received from the bank was income in
his hand and it could be diminished only if there was a provision in law
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ITA NO.4501/M/10 10
which permits such diminution. In other words, a deduction can be
allowed under a particular head only when there is a provision for the
same. This can be easily understood by a simple example. Let us say
there is one Mr. X who is a salaried employee. He may incur some
expenses in connection with his employment say on purchase of books
necessary to discharge his duties as an employee. Earlier there was a
provision u/s.16[1][a] for standard deduction and he could be allowed
such standard deduction subject to limits prescribed. Now, that
provision has been removed and thus whatsoever expenditure is
incurred may be having close connection with his employment, but the
same cannot be allowed in the absence of any such provision. The
situation would be different if the same person was receiving the
income as commission because in that case the income would be
assessable under the head business income and purchase of books for
rendering such services would constitute business expenditure. This
means the allowability of expenditure is not dependant on the
necessity of the expenditure but it is based on the provision of the Act
under a particular head under which income has to be assessed.
Another example is brokerage incurred by a person while giving his
property on rent. Though this expenditure is necessary for earning
rental income but in the absence of any provision, this expenditure is
not allowable. See the decision of Hon'ble Delhi High Court in the case
of CIT vs. S. G. Gupta & Sons [149 ITR 253]. Therefore, in case before
us as observed earlier the allowability of portfolio advisory fee has to
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ITA NO.4501/M/10 11
be tested under the provisions of sec.48. As observed above, the Ld.
Counsel of the assessee despite specific argument of Ld. DR did not
show us as to how the portfolio fee has any connection with the
transfer of asset and the same cannot be allowed. Therefore the
theory that a particular expenditure is genuine and it is not disputed
that same has been incurred and same was necessary for a particular
purpose, the expenditure does not become allowable if there is no
specific provision for the same. Therefore, in our view the expenditure
incurred in connection with fee of portfolio management has nothing to
do with the cost of acquisition of shares or transaction of shares and,
therefore, is held to be not allowable. We find no force in the alternate
submissions also because expenditure has been claimed under the
head capital gains and now assessee cannot make a new case that
such expenditure may be allowed fully or proportionately u/s.37
without showing us that how this expenditure pertained to the income
assessable under the head business and accordingly we reject the
alternate claim. The above view is further supported by the decision of
the Hon'ble Bombay High Court in the case of CIT vs. Radio Talkies
[238 ITR 872]. In this case the issue was allowability of expenditure on
payment of retrenchment compensation to the ex-employees. It was
one of the conditions precedent to the sale of property that the ex-
employees must be paid retrenchment compensation. The Hon'ble
High Court while reversing the order of the Tribunal held that such
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ITA NO.4501/M/10 12
expenditure was not allowable. In fact after quoting the provision of
sec.48 it was observed as under:
“This section lays down the mode of computation of capital gains. Two items are allowed as deductions from the full value of the
consideration for which the transfer is made for arriving at capital gains. The first item is expenditure incurred wholly and exclusively in connection with such transfer. The second item is the cost of acquisition of the capital asset and the cost of any improvement
thereto. In this case, we are concerned only with the first item. The question that arises for consideration is whether the retrenchment compensation paid by the assessee to its former employees can be
regarded as an expenditure incurred wholly and exclusively in connection with the transfer of land and building by the assessee to
the purchaser. The expenditure incurred wholly and exclusively in connection with the transfer can be expenditure like commission paid to the broker and/or similar other expenditure. The retrenchment compensation paid by the assessee to its employees, in our opinion, has no connection whatsoever with the transaction of sale of the land and building. It is connected only with the closure of the business of the assessee in March, 1972. Such expenditure by no stretch of imagination can be regarded as expenditure incurred wholly and exclusively for the purpose of the transaction of sale of the property.
The retrenchment compensation has no connection whatsoever with the transfer of property in question. The stipulation in the agreement
merely requires the owner to clear all its liabilities on certain accounts and to keep the transferee indemnified. This stipulation cannot change the character of the retrenchment compensation from
a liability arising out of the closure of the business to expenditure incurred wholly and exclusively in connection with the transfer of the asset in question.”
From the above it is clear that despite there being a condition for
payment of retrenchment compensation before the transfer of the
property i.e. there was a necessity for such expenditure till the same
was held to be not allowable. Similarly, Hon'ble Delhi High Court in the
case of Smt. Sita Nanda vs. CIT [251 ITR 575] was concerned with the
issue regarding a claim of expenditure in respect of payment of
unearned increase to the government for effecting the transfer of
lease-hold rights. Again the Hon'ble High Court after quoting sec.48
observed as under:
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ITA NO.4501/M/10 13
“A bare reading of the provision makes it clear that what can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The amount which the assessee claimed to be covered was not really a part of the unearned
increase. On the contrary it was the amount paid for making the payment demanded by the LDO belatedly. The interest, as was noted
by the Tribunal, had to be paid by the assessee as she made the payment of unearned increase belatedly. The crucial words in the provisions are "in connection with such transfer". The expression
means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such
expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer. The Tribunal was, therefore, right in its conclusion that the payment of interest was in the shape of damages for late payment of unearned increase. That being so, the interest paid cannot be treated as expenditure incurred wholly and exclusively in connection with the transfer. The answer to the question is in the negative, in favour of
the Revenue and against the assessee.”
Thus it is clear that unless and until expenditure is incurred “in
connection with such transfer” the same cannot be allowed and as
observed by us the expenditure for payment of portfolio management
fee has nothing to do with the transfer of shares and this was taken as
a specific argument by the Ld. DR against which no submissions were
made by the Ld. Counsel of the assessee. Therefore, in our view such
expenditure cannot be allowed. Similar view was taken in the case of
Devendra Motilal Kothari vs. DCIT [supra]. In view of this discussion,
we find nothing wrong with the order of the ld. CIT(A) and confirm the
same.
15. However, as far as share transaction charges are concerned
they would be allowable if they are in the nature of share brokerage or
any other charges charged by the broker, but at the same time Ld.
Counsel of the assessee could not give the exact nature of the charges
and accordingly we set aside the order of the ld. CIT(A) and remit the
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ITA NO.4501/M/10 14
matter to the file of the AO with a direction to examine the exact
nature of the charges and then adjudicate this issue.
16. Issue No.3: After hearing both the parties we find that assessee
had invested a sum of Rs.30,000/- in tax saving scheme of mutual
funds and deduction for the same u/s.80C was not claimed in the
original return. In fact, it was submitted before us that the claim was
made by way of a letter without revising the return. AO has not dealt
with this issue. The ld. CIT(A) on appeal rejected the claim on the
basis that the claim could not be allowed in the absence of revised
return by following the decision of the Hon'ble Supreme Court in the
case of Goetze [India] Ltd. vs. CIT [284 ITR 323].
17. Before us, Ld. Counsel of the assessee argued that assessee
had made investment of Rs.30,000/- which was allowable as deduction
u/s.80-C. This issue was taken up before the ld. CIT(A) who dismissed
the same in view of the decision of the Hon'ble Supreme Court in the
case of Goetze [India] Ltd. vs. CIT [supra]. He submitted that when
claim is made for the first time before the appellate authorities, then
same should have been allowed. He relied on the decision of Mumbai
Bench of the Tribunal in the case of Chicago Pneumatics India Ltd. vs.
DCIT [15 SOT 252].
18. On the other hand, Ld. DR submitted that AO has no right to
allow any claim in the absence of revised return and, therefore, ld.
CIT(A) was correct in dismissing the claim particularly in view of the
decision of Hon'ble Bombay High Court.
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ITA NO.4501/M/10 15
19. We have considered the rival submissions carefully and find that
no doubt that a claim cannot be allowed without revised return in the
light of the decision of the Hon'ble Supreme Court in the case of
Goetze [India] Ltd. vs. CIT [supra]. However, the Hon'ble Supreme
Court itself has observed in the case of Goetze [India] Ltd. vs. CIT
[supra] that this restriction is not applicable if the issue is raised before
the appellate authority. Therefore, the power of the appellate authority
to entertain such claim is still there. Therefore, in the interests of
justice we set aside the order of the ld. CIT(A) and remit the matter to
the file of the AO with a direction to consider this claim.
20. In the result, assessee’s appeal is partly allowed for statistical
purposes.
Order pronounced in the open Court on this day of 10/8/2011.
Sd/-
Sd/-
(D.MANMOHAN) (T.R.SOOD) Vice President Accountant Member
Mumbai: 10/8/2011. p/-*
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