ORDER
Anikesh Banerjee, Judicial Member.- The instant appeal of the assessee filed against the order of the Ld. Assistant Commissioner of Income Tax, Appeal ADDL/JCIT (A)-1, Delhi [for brevity “Ld. CIT(A)”], order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), for Assessment Year 2011-12, date of order 28.08.2025. The impugned order emanated from the order of the Ld. Deputy Commissioner of Income Tax 12(1), Mumbai (for brevity ‘Ld. AO’), order passed under Section 143(3) of the Act, date of order 24.03.2014.
2. The brief facts of the case are that the assessee filed its return by declaring total income Rs. 72,26,297/- derived from various sources of income that is income from salary, short term capital gain and income from other sources. The assessee’s return was processed and expenses amounting to Rs. 8,42,360/- claimed on account of fees and charges under the head “income from capital gains” was disallowed by the Ld. AO in order passed u/s. 143(3) of the Act. The Ld. AO observed that the charges claimed as deduction cannot be held as “expenditure incurred wholly and exclusively in connection with transfer of capital asset” as per section 48 of the Act. The aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) observed that the assessee had incurred the expenses and are related to the fees charged by the portfolio manager for sale and purchase of securities and allied activities. The assessee paid the fees to the portfolio manager that is Trust Investment Advisors Pvt. Ltd. for twin purposes:
| (i) |
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Purchase of investment securities; |
| (ii) |
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Sale of same which is not allowable u/s. 48 of the Act. |
The Ld. CIT(A) during adjudication the issue has relied on the order of The Coordinate Bench of ITAT, Pune Bench “A” in case of
KRA Holding and Trading Pvt Ltd. v.
DCIT 54 SOT 493 (Pune). The Portfolio Management Scheme (PMS) fees paid by the assessee were to be allowed as deduction while computing capital gains arising from sale of shares. But the Ld. CIT(A) had finally relied on the order of the Coordinate Bench of ITAT,
Mumbai in case of
CIT v.
Apurva Mahesh Shah 172 ITD 127 (
Mumbai/
ITA No. 6959/Mum/2011 order dated 29.06.2018 wherein PMS fees and performance linked charges are not deductible u/s. 48 of the Act. Respectfully relied on the order of The Coordinate Bench of ITAT,
Mumbai, the Ld. CIT(A) had rejected the appeal of the assessee. Being aggrieved, the assessee filed an appeal before us.
3. The Ld. AR argued and contended that the issue as to whether Portfolio Management Service (PMS) expenditure is allowable as a deduction under section 48 of the Act is not settled, as divergent views have been expressed by different Coordinate Benches of the Tribunal. The Ld. AR further submitted that in KRA Holding and Trading Pvt. Ltd. (supra), the revenue had challenged the order of the Coordinate Bench before the Hon’ble Bombay High Court. However, the only substantial question of law raised before the Hon’ble High Court was as follows:
“Whether on facts and circumstances of the case, the ITAT was justified in holding that the income earned by assessee by the portfolio management scheme was liable to be assessed under the head “capital gains” instead of being assessed under the head “profit and gains of business or profession?”
The Ld. AR further contended that the revenue had never raised any substantial question of law before the Hon’ble Jurisdictional High Court regarding the allowability of PMS charges as a deduction under section 48 of the Act. It was, therefore, submitted that the findings of the Coordinate Bench of the ITAT, Pune on this issue attained finality, as the revenue did not challenge the same before the Hon’ble Jurisdictional High Court.
4. The Ld. AR had placed the observation of The Coordinate Bench of ITAT, Mumbai and ITAT, Delhi related to the issue for allowability of the PMS charges related to claim of deduction u/s. 48 from capital gain. The following orders of the coordinate benches of the ITAT are in favour of the assessee which are as follows:-
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Zarah Rafik Malik v. ITO (Mumbai – Trib.). The relevant para no. 14 is reproduced as below: |
“14. Regarding disallowance of the Portfolio Management Service (PMS) expenses the Id AR submitted that the expenses amounting to Rs.1,84,696/-have been claimed against long term capital gains on sale of shares of Rs 7,72,883/- and Rs 23,694/- has been claimed against short term capital gains. It was submitted that these shares are other than shares sold as part of IPO and the same were held under the PMS portfolio handed by Marcellus Investment Managers Limited. It was submitted that the AO has allowed Rs 23,693/- and at the same time, has not allowed Rs 1,84,696/- and that too, without issuing any show-cause to the assessee. It was submitted that the assessee has availed the services of Marcellus Investment Managers Limited for purchasing and selling the shares at best possible price and as part of the agreement, PMS expenses are deducted and net sale proceeds have only been remitted in the assessee’s bank account and these expenses are thus incurred wholly and exclusively towards the sale/transfer of shares and eligible for allowance. The Id DR has been heard who has relied on the order of the AO and the directions of the Id DRP. We find that where part of the PMS expenses have been allowed while computing short term capital gains, on parity of reasoning, the remaining part of expenses where claimed while computing long term capital gains deserve to be allowed to the assessee and in any case, admittedly, no show-cause was issued before disallowing these expenses. The AO is directed to allow the claim of these expenses and the ground of appeal is thus allowed.”
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ACIT v. Vireet Investment Pvt. Ltd. (Delhi – Trib.). The relevant observations of the bench are in para no. 12 is reproduced as below: |
“Considered the rival submissions and material placed on record. We observed that the assessee has established its business and carries on the business of dealing in shares, stocks, debentures, etc. in the line of securities transactions. The assessee claimed expenditure of general administration and PMS towards maintenance of securities against the income declared under the head Capital Gains. The AO rejected the same with the observation that there is no provisions in the section 48 to claim such expenses. The Id CIT(A) by relying on the decision of ITAT Pune and Mumbai, allowed the claim of the assessee. After careful consideration of the facts on record, we observed that the assessee is dealing in the business of shares and securities, the monitoring of such securities, the assessee has to incur certain expenses on PMS. Therefore, this expenditure is directly relating to the securities transaction. The nature of transaction demands such expenditures, therefore, on the similar facts on record, the ITAT Pune has considered the same and allowed such expenses. After careful consideration of findings of Id CIT(A), he has decided the issue in favour of the assessee and he has also considered the conflicting decisions and came to conclusion based on the Hon’ble Supreme Court decision of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) of Ld CIT(A) is reasonable findings on the issue of allowability of PMS expenses. Therefore, we are not inclined to disturb the same.”
5. The Ld. DR argued and contended that the Coordinate Bench of ITAT, Mumbai has already considered the alleged issue whether the PMS charges are allowable u/s. 48 of the Act with the capital gain income. The Ld. DR highly opposed the claim of deduction of PMS charges from income from capital gain. The Ld. DR stands in favour of the orders of revenue authorities. The Ld. DR invited our attention in the observations of the Ld. CIT(A). The relevant paragraph of impugned appellate order is reproduced as below:
“That while considering the submissions of the Appellant this office notes that PMS charges are composite in nature and primarily pertain to advisory, management, and consultancy services in respect of securities portfolio and on such account, it could be said that the PMS charges are not directly relatable to either the cost of acquisition or transfer of specific securities. In this regard reliance is also placed on the judgement of the Hon’ble ITAT, Mumbai in ACIT v. Apurva Mahesh Shah (ITA No. 6959/Mum/2011, AY 2007-08, order dated 29.06.2018) wherein it was held that PMS fees and performance-linked charges are not deductible u/s 48 as they are not expenditure incurred wholly and exclusively in connection with the transfer of shares. That following this judgement, which directly addresses the issue in dispute, the Appellant’s claim cannot be accepted.
Accordingly, this office finds no merit in the claim of the Appellant and the order dated 24.03.2014 passed u/s 143(3) of the Act by the AO is sustained and the disallowance of Rs. 8,42,360/- being PMS charges is upheld, and the consequential levy of interest u/s 234B and 234C is also sustained.”
6. The Ld. DR further argued and contended that the Coordinate Bench of ITAT, Mumbai in case of Apurva Mahesh Shah (supra) where the bench has decided the issue against the assessee. The observation of the Coordinate Bench in para no. 8 is reproduced as below:
“8. We have deliberated at length on the aforesaid order of the Tribunal and find ourselves to be in agreement with the view therein taken. We are of the considered view that as the Portfolio Management Fees and Performance Linked Fees were paid by the assessee to his portfolio manager de. M/s Enam Assets Management Company (P) Ltd. towards service charges for making investments of his funds and managing the portfolio of securities, therefore, the same not being an expenditure incurred wholly and exclusively in connection with the transfer of the shares out of which STCG had arisen to the assessee, had thus rightly been held by the A.O as not allowable as a deduction under Sec. 48 of the Act. We thus, in terms of our aforesaid observations set aside the order of the CIT (A) and uphold the disallowance of Rs. 1,13,12,737/-made by the A.O in respect of the Portfolio Management Fees and Performance Linked Fees which was claimed by the assessee as a deduction under Sec. 48 while computing the STCG on transfer of shares.”
7. We have heard the rival submissions and carefully perused the material available on record. The short controversy before us is whether the Portfolio Management Service (PMS) charges paid by the assessee are deductible while computing capital gains under section 48 of the Act. We find that divergent views have been expressed by different Coordinate Benches of the Tribunal on this issue. While the Mumbai Bench in Apurva Mahesh Shah (supra) has held that PMS fees are not deductible under section 48, the Pune Bench in KRA Holding and Trading Pvt. Ltd. (supra), the Mumbai Bench in Zarah Rafik Malik (supra), and the Delhi Bench in Vireet Investment Pvt. Ltd. (supra) have taken a contrary view and allowed such deduction in the facts of those cases.
Thus, two reasonable and plausible views exist on the interpretation of section 48 in relation to the allowability of PMS charges. The Hon’ble Supreme Court in
CIT v.
Vegetable Products Ltd. [1973] 88 ITR 192 (SC)] has laid down the settled principle that where two reasonable constructions of a taxing provision are possible, the interpretation favourable to the assessee should be adopted. This principle has consistently been applied where conflicting judicial views exist and no binding decision of the jurisdictional High Court or the Hon’ble Supreme Court directly settles the controversy. In the present case, the revenue has also not brought to our notice any binding decision of the Hon’ble Jurisdictional High Court or the Hon’ble Supreme Court specifically holding that PMS charges are not deductible under section 48 of the Act. In these circumstances, following the principle laid down by the Hon’ble Supreme Court in
Vegetable Products Ltd. (
supra), we deem it appropriate to adopt the view favourable to the assessee.
Accordingly, we hold that the PMS charges of Rs. 8,42,360/- are allowable as deduction while computing the capital gains under section 48 of the Act. The orders of the revenue authorities are set aside on this issue, and the Ld. AO is directed to allow the assessee’s claim. The grounds raised by the assessee are allowed.
8. In the result, the appeal of the assessee bearing ITA No.1685/Mum/2026 is allowed.
