KRA Holding & Trading Pvt Ltd vs. DCIT (ITAT Pune)

DATE: (Date of pronouncement)
DATE: June 12, 2011 (Date of publication)

Click here to download the judgement (KRA_Holding_PMS_shares_fees.pdf)

Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains

In ARA Trading & Investments Pvt Ltd vs. DCIT the Tribunal held that gains from a Portfolio Management Scheme were assessable as capital gains and not as business profits. The Tribunal had to now consider whether the fee paid to the AMC at 5% of the NAV was allowable as a deduction against the capital gains. The department relied on Devendra Motilal Kothari vs. DCIT 50 DTR 369 (Mum) and argued that as the fee was based on the NAV, there was no direct nexus with the transfer of the shares and so the expenditure was not allowable u/s 48. HELD taking a contrary view & deciding in favour of the assessee:

(i) In computing capital gains u/s 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as “expenditure incurred wholly and exclusively in connection with the transfer”. The expression “full value of consideration” contemplates additions and deductions from the apparent value. It means the “real and effective consideration“, which can be arrived at only after allowing the deductible expenditure (CIT v Shakuntala Kantilal 190 ITR 56 (Bom) followed);

(ii) The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. The department’s argument that fee should be share-specific is absurd because fees for shares transactions is never share specific but is volume based;

(iii) Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. The assessee’s method of accounting is to proportionately load the PMS fees on the opening portfolio and investments made during the year which means that no deduction is claimed for the fees on the unsold investments;

(iv) Devendra Kothari 50 DTR 369 (Mum) cannot be followed because (i) it unfortunately did not refer to the ‘read down’ interpretation of s. 48 as laid down in Shakuntala Kantilal and (ii) on facts, the claim there was on the entire turnover on global basis and not restricted to only investments.

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