Shri Homi K. Bhabha vs. ITO (ITAT Mumbai)

PMS Fees not deductible against capital gains. Despite dissenting orders, reference to Special Bench not necessary

The assessee placed Rs. 2.25 crores with ENAM Asset Management Co, a portfolio manager, which was used for purchase and sale of securities etc and gave rise to capital gains. The assessee paid the portfolio manager fees being 1/2% of the NAV of securities under management in addition to 20% of the profits in excess of 15% of the profits after expenses. The assessee claimed that the said fee had direct relation with the capital gains and so was deductible either as (i) diversion of income by overriding title from the sale proceeds or as (ii) part of the cost of acquisition of the shares or as (iii) expenditure incurred wholly and exclusively in connection with the transfer of shares. The AO & CIT (A) rejected the claim. Before the Tribunal, the assessee argued that though the decision of the Mumbai Bench in Devendra Motilal Kothari 50 DTR 369 (Mum) was against the assessee, the decision of the Pune Bench in KRA Holding & Trading which had taken a contrary view had to be followed. HELD dismissing the appeal:

(i) While, in Devendra Motilal Kothari 50 DTR 369, the Mumbai Bench held that the fees paid for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement, the Pune Bench in KRA Holding & Trading declined to follow that by relying on the judgement of the Bombay High Court in Shakuntala Kantilal 190 ITR 56 (Bom). Subsequently, the Mumbai Bench in Pradeep Kumar Harlalka (included in the file) declined to follow the Pune Bench on the ground that the judgement of the Bombay High Court in Shakuntala Kantilal had been held to not be good law in Roshanbabu Mohammed 275 ITR 231 (Bom). The majority opinion (in terms of number of orders) and the latest order (in the point of time) were against the assessee.

(ii) The argument that the Mumbai Benches had not appreciated the correct position in law is not acceptable. 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 though there are no fetters on its powers to doubt the correctness of the earlier order if there are compelling reasons for the same. Further, whether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench.