Income-tax Officer, Ward-2(1), Pune V. Smt. Anju Suresh Parakh, Pune

ITA 1395/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9776 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 09-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS VINITA MENON
• Keywords: Capital asset; Business income; Depreciation; Opportunity of being heard; Cost of acquisition
• Section: 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ASSESSEE BY : SHRI.NIK HIL PATHAK REVENUE BY : MRS. VINI TA MENON DATE OF HEARING : 08/11/1 2 DATE OF PRONOUNCEMENT : 26 -11-12 O R D E R PER BENCH : THIS BATCH OF TWO APPEALS BY THE REVENUE AND TWO C ROSS OBJECTIONS BY THE ASSESSEE PERTAIN TO A.Y. 2008-2009. THE APPEAL S ARE FILED BY THE REVENUE CHALLENGING THE IMPUGNED ORDERS OF THE LD C IT(A)-II, PUNE DATED 30 TH AUGUST 2011 PASSED IN THE CASE OF TWO DIFFERENT AS SESSEES. THE ASSESSEES HAVE ALSO FILED CROSS OBJECTIONS RAISING GRIEVANCE AGAINST THE PART OF THE ORDERS OF THE CIT(A). ITA NO. 1395/PN/2011 AND C.O. NO. 103/PN/2011 2. IN THIS APPEAL, THE REVENUE HAS TAKEN THE MULTIP LE GROUNDS. THE FIRST ISSUE WHICH ARISES FOR OUR CONSIDERATION IS AS UNDE R : 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) GROSSLY ERRED IN NOT APPRECIATING THAT THE GAINS OF RS. 26,30,954/- SHOWN AS SHORT TERM SL. NO. ITA NO./ C.O.NO. ASSTT. YEAR APPELLANT RESPONDENT 1. ITA 1395/PN/2011 2008-09 INCOME TAX OFFICER, WARD 2(1), PUNE SMT.ANJU SURESH PARAKH, 584/1, SALISBURY PARK PUNE 411037 PAN : AAFBPP0819E 2. ITA 1396/PN/2011 2008-09 -DO- SMT. ASHA PARAKH 584/1, SALISBURY PARK, GULTEKADI, PUNE 411 037 PAN: NOT AVAILABLE 3. C.O. 103/PN/2011 2008-09 SMT. ANJU PARAKH 584/1, SALISBURY PARK PUNE 411037 PAN : AAFBPP0819E INCOME TAX OFFICER, WARD 2(1), PUNE 4. C.O. 104/PN/2011 2008-09 SMT. ASHA PARAKH 584/1, SALISBURY PARK, GULTEKADI, PUNE 411 037 PAN: NOT AVAILABLE INCOME TAX OFFICER, WARD 2(1), PUNE 2 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 CAPITAL GAIN AND RS. 34,65,403/- SHOWN AS LONG TERM CAPITAL GAIN WAS EARNED FROM TRADING IN SHARES, AND, THEREFORE, SUCH GAINS HAD BEEN RIGHTLY ASSESSED UNDER THE HEAD PROFITS AND GAINS OF BUSIN ESS OR PROFESSION. 3. THE FACTS WHICH REVEAL FROM THE RECORD ARE AS UN DER. AS NOTED BY THE A.O, THE ASSESSEE IS IN THE INVESTMENT IN SHARES AN D MUTUAL FUNDS. THE ASSESSEE FILED THE RETURN OF INCOME FOR A.Y. 2008- 09 DECLARING TOTAL INCOME OF RS. 26,03,586/-. THE ASSESSEE HAD DECLARED THE CAPITAL GAIN FROM THE SHARE TRANSACTIONS THROUGH THE PMS AS UNDER : 1. SHORT TERM CAPITAL GAIN RS. 26,30,954/- 2. LONG TERM CAPITAL GAIN RS.34,65,403/- TOTAL RS.60,96,357/- ========== 4. AS OBSERVED BY THE A.O, THE ASSESSEE HAS TRANSAC TED HEAVILY IN SHARES DIRECTLY AS WELL AS THROUGH THE PORTFOLIO MANAGEMEN T SERVICE PROVIDER. INCOME EARNED THROUGH THE PORTFOLIO MANAGEMENT SERV ICE ( IN SHORT PMS) HAS BEEN DECLARED UNDER THE HEAD CAPITAL GAIN. T HE ASSESSEE TRANSACTED IN THE SECURITIES/SHARES BY ENTERING INTO AN AGREEM ENT WITH ENAM ASSET MANAGEMENT CO. PVT. LTD. (IN SHORT ENAM). THE A.O. HAS DISCUSSED THE CLAUSES OF AGREEMENT WITH ENAM IN PARA NO. 4.1. TH E A.O ALSO REFERRED TO THE INSTRUCTION NO. 1827 DATED 31 ST AUGUST 1989 ISSUED BY THE CBDT IN WHICH CERTAIN GUIDELINES ARE GIVEN TO DECIDE WHICH SHARES ARE TO BE TREATED AS STOCK-IN-TRADE AND INVESTMENT. THE A.O HAS REPR ODUCED SUCH GUIDELINES IN PARA NO. 4.3 OF THE ASSESSMENT ORDER. THE A.O. HAS REFERRED THE CBDT CIRCULAR NO. 4/2007 DATED 15 TH JUNE 2007 ISSUED BY THE CBDT IN PARA NO. 4.5 OF THE ASSESSMENT ORDER. THE A.O. HAS OBSERVED THA T UNDER A PORTFOLIO MANAGEMENT SERVICE (PMS), THE ASSESSEE IS ENTRUSTI NG A LUMPSUM AMOUNT TO THE PORTFOLIO MANAGER FOR PURCHASES AND SALE OF SHARES AND TO MAKE PROFIT THROUGH THE PORTFOLIO MANAGER WHICH ALTERNATELY BUY AND SELL NUMBER OF SHARES ON BEHALF OF HIS CLIENT AND MAKES PROFIT OR LOSS ON SUCH TRANSACTIONS. THE PORTFOLIO MANAGER ACTS AS AN AGENT OF THE ASSES SEE, WHO CONDUCT THE BUSINESS OF THE ASSESSEE IN THE ORGANIZED WAY. 5. THE ASSESSEE STATED BEFORE THE A.O THAT HE HAD ENTERED INTO PORTFOLIO MANAGEMENT AGREEMENT WITH ENAM AND AS PER THE SAID AGREEMENT, THE ASSESSEE ENTRUSTED RS. 2.5 CRORES FOR INVESTING IN STOCK MARKET SINCE ENAM HAD EXPERTISE IN THE STOCK MARKET. THE ASSESSEE AL SO EXPLAINED HER RELATIONSHIP WITH THE ENAM AND IN PURSUANCE OF THE AGREEMENT. THE 3 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 ASSESSEE FURTHER STATED THAT THE GAIN ARISING ON AC COUNT OF PMS IS A CAPITAL GAIN AND THE SAME CANNOT BE ASSESSED AS THE BUSINES S INCOME. IT WAS FURTHER STATED THAT THE ASSESSEE HAS NOT BORROWED A NY AMOUNT FOR MAKING THE INVESTMENT AND OWN FUNDS WERE USED. THE ASSESS EE ALSO STATED THAT IT IS IN THE DISCRETION OF THE ENAM TO PURCHASE ANY SHARE AND CRITERIA OF NUMBER OF TRANSACTIONS CANNOT BE APPLIED IN THE CASE OF PORTF OLIO MANAGEMENT BECAUSE THE ASSESSEE DOES NOT HAVE ANY CONTROL ON THE NUMB ER OF TRANSACTIONS BEING ENTERED INTO BY THE ENAM. THE A.O. WAS NOT IMPRESS ED WITH THE EXPLANATION OF THE ASSESSEE. IN HIS OPINION, THERE IS NO MERIT IN THE SAID EXPLANATION. THE A.O. ALSO OBSERVED THAT THE RELATIONSHIP BETWEE N THE ASSESSEE AND THE PORTFOLIO MANAGER IS FIDUCIARY. IT IS FURTHER OBSE RVED THAT WHETHER THE ASSESSEE PURCHASES AND SALES THE SHARES HIMSELF THR OUGH A BROKER OR A PORTFOLIO MANAGER DOES NOT MAKE ANY DIFFERENCE. HE OBSERVED THAT THE NATURE AND CHARACTER OF THE TRANSACTION ALONG WITH THE FREQUENCY OF SUCH TRANSACTIONS, INTENTION ETC. ARE TO BE SEEN TO DETE RMINE WHETHER THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE IN THE NATURE OF INVESTMENT OR DEALING IN SHARES. THE A.O FINALLY HELD THAT THE G AINS ON THE SHARE TRANSACTIONS THROUGH THE PORTFOLIO MANAGEMENT PROVI DER IS A BUSINESS INCOME AND SAME CANNOT BE TREATED AS A CAPITAL GAIN. HE, THEREFORE, TREATED THE SAID ACTIVITY AS A BUSINESS ACTIVITY OF THE ASSESSE E AND AFTER ALLOWING THE DEDUCTION IN RESPECT OF THE FEES PAID TO THE ENAM, DETERMINED THE NET PROFIT AT RS. 37,84,858/- AND TREATED THE SAME AS BUSINES S INCOME AND BROUGHT TO TAX. 6. THE ASSESSEE CHALLENGED THE ACTION OF THE A.O BE FORE THE LD CIT(A). THE LD CIT(A) ALLOWED THE ASSESSEES APPEAL RELYING ON THE DECISION OF HIS PREDECESSOR IN THE CASE OF SURESH H. PARAKH, HUSBAN D OF THE ASSESSEE. THE LD CIT(A) HAS REPRODUCED THE OPERATIVE PART OF SAID ORDER, MORE PARTICULARLY, THE REASONS AND FINDINGS IN THE IMPUGNED ORDER IN P ARA NO.4.3. THE LD CIT(A) ALLOWED THE ASSESSEES GROUND AND HELD THAT THE PROFITS OR GAIN ON THE SHARE TRANSACTIONS THROUGH THE PMS IS TO BE ASS ESSED AS THE CAPITAL GAIN AND NOT AS THE BUSINESS INCOME. NOW THE REVENUE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE PARTIES. THE LD. COUNSEL SUBM ITS THAT ON THE IDENTICAL SET OF FACTS IN THE CASE OF ANOTHER FAMIL Y MEMBER, NAMELY SMT. ASHA PRAKASH PARAKH, THE TRIBUNAL HAS CONFIRMED THE ORDER OF THE LD CIT(A), 4 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 IN WHICH ALSO, THE SHARE TRANSACTIONS WERE ENTERED INTO BY ENGAGING THE PMS. THE LD. COUNSEL FILED THE COPY OF THE TRIBUNAL ORDER IN THE CASE OF DY CIT VS. ASHA PARAKH IN ITA NO. 630/PN/2011 AND C.O. NO. 13/PN/2011, ORDER DATED 31/8/2012 (ANOTHER APPEAL IN THIS BATCH ).. WE HAVE ALSO HEARD THE LD. D.R. WE FIND THAT IN THE CASE OF ASHA PARA KH (SUPRA), THERE WAS AN IDENTICAL CONTROVERSY ON THE IDENTICAL SET OF FACTS . THE SAID ASSESSEE DECLARED THE PROFITS/GAIN ON THE SHARE TRANSACTIONS ENTERED THROUGH THE PMS UNDER THE HEAD CAPITAL GAIN BUT THE A.O TREATED T HE SAME AS A BUSINESS INCOME. THE LD CIT(A) REVERSED THE ORDER OF THE A. O AND ACCEPTED THE PLEA OF THE ASSESSEE AND HELD THAT THE TRANSACTIONS ROUT ED THROUGH THE PMS CANNOT BE TREATED AS A BUSINESS INCOME. THE REVENU E CHALLENGED THE ORDER OF THE LD CIT(A) BEFORE THE TRIBUNAL AND THE TRIBU NAL CONFIRMED THE ORDER OF THE LD CIT(A) BY FOLLOWING THE DECISION OF THE ITA T, PUNE BENCH, IN THE CASE OF DCIT VS. KRA HOLDING AND TRADING PVT. LTD., ITA NO. 356/PN/2011, ORDER DATED 25 TH JULY, 2012. THE OPERATIVE PART OF THE SAID ORDER IS AS UNDER : 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHAL F OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND UND ER IDENTICAL FACTS & CIRCUMSTANCES THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. KRA H OLDING AND TRADING PVT. LTD. (WHEREIN BOTH OF US ARE PARTIES) VIDE ITA NO. 356/PN/2011 ORDER DATED 25-07-2012 FOR ASSESSMENT YEAR 2007- 08 HAS UPHELD THE ORDER OF THE CIT(A) WHEREIN GAIN ON SALE OF SHARES AND MUTUAL FUNDS WAS HELD AS SHORT TERM AND LONG TERM CAPITAL GAIN BY THE CIT (A). THE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 5 OF THE ORDER READS AS UNDER : 5. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE PARTIES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO GONE THROUGH THE DECISION O F THE TRIBUNAL IN ASSESSEES OWN CASE. BOTH THE PARTIES FAIRLY CONCEDED THAT TH E ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2004-05. WE FIND THE TRIBUNAL IN ASSESSEES OWN CA SE FOR A.Y. 2004-05 VIDE ITA NO. 500/PN/08 ORDER DATED 31-08-2009 ALLOWED THE CL AIM OF SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ON SALE OF SHARES A ND REDEMPTION OF MUTUAL FUNDS. WE FIND FOLLOWING THE SAID DECISION THE TRIB UNAL VIDE ITA NO. 1320/2008 AND ITA NO. 434/2009 ALLOWED THE CLAIM OF SHORT TER M CAPITAL GAIN AND LONG TERM CAPITAL GAIN FOR A.Y. 2005-06 AND 2006-07. ALTHOUG H THE DEPARTMENT HAS CHALLENGED THE ORDER OF THE TRIBUNAL BEFORE THE HON BLE HIGH COURT ON THIS ISSUE AND THE HONBLE HIGH COURT HAS ONLY ADMITTED THE AP PEAL, HOWEVER NO DECISION REVERSING THE DECISION OF THE TRIBUNAL WAS FILED BE FORE US. THEREFORE, RESPECTFULLY FOLLOWING THE DECISIONS OF THE TRIBUNAL IN ASSESSEE S OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE AGAINST THE ORDER OF THE TRIBUNAL WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSU E. GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 6.1 DESPITE HIGH VOLUME, FREQUENCY AND ORGANISED AC TIVITY IN PURCHASE & SALE OF SHARES, PROFIT FROM SUCH PURCHASE & SALE OF SHARES IS BEING TREATED AS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN AS THE CASE MAY BE BY THE COORDINATE B ENCHES OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNA L IN THE CASE OF KRA HOLDING AND TRADING PVT. 5 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 LTD. (SUPRA) AS WELL AS THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA) WE UPHOLD THE ORDER OF THE CIT(A) IN TREATI NG SUCH PROFIT FROM PURCHASE AND SALE OF SHARES AS CAPITAL GAIN. THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE ARE ACCORDINGLY DISMISSED. WE FIND THAT THE FACTS IN THE CASE OF ASHA PARAK AR E IDENTICAL AS IN THE CASE OF PRESENT CASE. WE, THEREFORE, FOLLOWING THE ORDER I N THE CASE OF ASHA PARAKH (SUPRA) CONFIRM THE ORDER OF THE CIT(A) AND RELEVA NT GROUNDS TAKEN BY THE REVENUE ARE DISMISSED. 8. THE NEXT ISSUE IS DISALLOWANCE MADE BY THE A.O. U/S. 14A OF THE ACT AND THIS ISSUE ARISES FROM GROUND NO. 11 OF THE REV ENUES APPEAL WHICH READS AS UNDER : 11. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) OUGHT TO HAVE CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER U/S 14A OF THE INCOME-TAX ACT, 1961 R.W.R. 8D OF THE IN COME-TAX RULES, 1962 INSTEAD OF HOLDING THAT NO EXPENSES REMAINED T O BE DISALLOWED BY APPLYING AFORESAID SECTION/RULE. 9. THE A.O. HAS OBSERVED THAT THE ASSESSEE HAS EARN ED DIVIDEND FROM THE ACTIVITIES OF THE SHARE TRANSACTIONS IN PERSONAL A /C. FROM PMS WHICH WAS TO THE EXTENT OF RS. 68,960/- AND WHICH IS CLAIMED AS AN EXEMPT. THE A.O. DISALLOWED RS. 25,854/- OUT OF THE FEES PAID TO THE PMS PROVIDERS TOWARDS EARNING OF THE DIVIDEND AS AN EXPENDITURE. THE A.O . ALSO PROCEEDED TO MAKE THE PROPORTIONATE DISALLOWANCE U/S. 14A R.W.R. 8D. HE WORKED OUT THE AVERAGE INVESTMENT AFTER CONSIDERING THE INVESTMENT AS ON 1.4.2007 AND AS ON 31 ST MARCH 2008, 0.5% OF THE AVERAGE INVESTMENT OF RS. 8,66,92,762/- WAS WORKED OUT AT RS. 4,33,464/- WAS DISALLOWED. T HE LD CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE A.O. WE HAVE ALREADY HELD THAT THE GAIN/PROFIT FROM THE SHARE TRANSACTIONS BY ENGAGING THE PMS PROVIDER IS TO BE ASSESSED AS A CAPITAL GAIN. THE ENTIRE CAPITAL GAI N IS NOT TAXABLE. ONLY THE SHORT TERM CAPITAL GAIN IS TAXABLE. SO FAR AS THE LONG TERM CAPITAL GAIN IS CONCERNED, THE SAME IS CLAIMED AS EXEMPT U/S. 10(38 ) OF THE ACT. HENCE, PROVISIONS OF SEC. 14A ARE APPLICABLE AND DISALLOWA NCE HAS TO BE WORKED OUT APPLYING RULE 8D OF THE I.T. RULES. WE, ACCORDINGL Y, SET ASIDE THE ISSUE OF THE 14A TO THE FILE OF THE A.O TO WORK OUT THE DISA LLOWANCE U/S. 14A R.W.R. 8D OF THE I.T. RULES TO THE FILE OF A.O., MORE PARTICU LARLY, WHICH IS INCURRED IN RELATION TO LONG TERM CAPITAL GAIN CLAIMED EXEMPT. NEEDLESS TO SAY THE A.O SHOULD GIVE OPPORTUNITY OF BEING HEARD TO THE ASSES SEE. IN THE RESULT, GROUND NO. 11 IS ALLOWED FOR THE STATISTICAL PURPOSES. 6 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 10. NOW WE TAKE THE CROSS OBJECTION FILED BY THE AS SESSEE BEING C.O. NO. 103/PN/2011. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS : 1] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE EXP ENDITURE INCURRED IN THE FORM OF FEES AND OTHER PAYMENTS TO PORTFOLIO MA NAGEMENT SERVICES (PMS) PROVIDERS WOULD NOT BE ALLOWED AS AN EXPENDIT URE WHILE COMPUTING THE CAPITAL GAINS. 2] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE PAYMENT MADE TO PMS PROVIDERS WAS EXPENDITURE INCURRED WHOLLY AND EXCLU SIVELY IN CONNECTION WITH TRANSFER AND THEREFORE, THE CLAIM W AS ALLOWABLE. 3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEAR NED CIT(A) ERRED IN NOT APPRECIATING THAT THE AMOUNT PAID TO PMS PROVID ERS OUGHT TO HAVE BEEN REDUCED FROM THE SALE CONSIDERATION WHILE COMP UTING CAPITAL GAINS. 11. WE HAVE HEARD THE PARTIES. THE ASSESSEE HAS RA ISED THE GRIEVANCE AGAINST THE ORDER OF THE LD CIT(A) FOR NOT ALLOWIN G THE FEES PAID FOR THE PMS SERVICES TO THE ENAM. THE ASSESSEE CITED THE DECIS ION OF THE ITAT, PUNE BENCH IN THE CASE OF KRA HOLDING AND PVT. LTD. VS. DCIT, ITA NO. 500, 1230/PN/2008 & 434/PN/2009 AND ARA TRADING INVESTM ENT PVT. LTD. VS. DCIT, ITA NOS. 499, 1321, & 1322/PN/2008, AND 806/ PN/2009, ORDER DATED 31-5-2011. THE LD CIT(A) MERELY OBSERVED THAT THE CASE LAW CITED BY THE ASSESSEE IS DISTINGUISHABLE ON FACTS AND THE ASSESS EE HAS NOT DEMONSTRATED THE DIRECT LINKAGE OF THE EXPENDITURE, THE SHARES A S WELL AS THE CLAIM OF FEES ON THE ENTIRE TURNOVER ON GLOBAL BASIS. THE LD CI T(A) ALSO CONSIDERED THE DECISION OF ITAT IN THE CASE OF DEVENDRA KOTHARI, 5 0 DTR 369 (MUM.). WE FIND THAT IN THE CASE OF KRA HOLDINGS & PVT. LTD. , VS. DCIT (SUPRA), THE ITAT PUNE BENCH HAS HELD THAT THE FEES PAID TO THE PMS PROVIDER IS AN ALLOWABLE EXPENDITURE. THE SAID DECISION HAS BEEN F OLLOWED BY THE ITAT A BENCH, PUNE IN THE CASE OF ASHA PARAKH VS. DY CIT, CIRCLE 2 (PUNE), ITA NO. 630/PN/2011 & C.O. NO. 13/PN/2011, ORDER DATED 31 ST AUGUST 2012. THE RELEVANT OBSERVATIONS AND FINDINGS OF THE TRIBUNAL IN THE CASE OF ASHA PARAKH (SUPRA) ARE AS UNDER : 10.1 SO FAR AS THE FEES PAID TO PMS PROVIDERS AS AN ALLOWABLE EXPENDITURE, WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KRA HOLDING AN D TRADING PVT. LTD. VS DCIT VIDE ITA NO. 240/PN/2011 ORDER DATED 25-07-2012 FOR ASSESSMENT Y EAR 2007-08 (IN WHICH BOTH OF US ARE 7 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 PARTIES) HAS HELD THE FEES PAID TO THE PMS PROVIDER AS AN ALLOWABLE EXPENDITURE. THE RELEVANT OBSERVATION OF THE TRIBUNAL FROM PARA 9 ONWARDS REA D AS UNDER : 9. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THE TRIBUNAL IN ASSESSEES OWN C ASE VIDE ITA NO. 500/PN/2008 FOR ASSESSMENT YEAR 2004-05 HAS DECIDED THE ISSUE AND ALLOWED THE CLAIM OF PORTFOLIO MANAGEMENT FEES BY HOLDING A S UNDER : 19. WE HEARD THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE. ALLOWABILITY OF THE FEE PAID TO THE M/S ENAM, THE PORTFOLIO MANA GER FOR PURCHASE AND SALE OF THE SECURITIES UNDER SECTION 48 OF THE ACT IS THE I SSUE FOR ADJUDICATION BEFORE US. THE STANDS OF THE PARTIES ON THIS ISSUE ARE AS FOLL OWS. AS PER THE REVENUE, WHILE THE AO MADE DISALLOWANCE FOR COUPLE OF REASONS: (I) THE PAYMENT IS NOT AS PER THE AGREEMENT, AS THE AGREEMENT WAS NEVER TERMINATED IN REALITY; (II) THE PAYMENT WAS NOT AUT HORIZED BY THE SEBI REGULATIONS, 1993, CIT(A) AUTHORITY CONFIRMED THE S AID DISALLOWANCE ALSO FOR ANOTHER REASONS THAT THE SAID PAYMENT ATTRACTS PROVISIONS OF THE EXPLANATION TO SUB-SECTION (1) OF SECTION 37 OF THE IT ACT. THE SAID FEE IS NOT ALLOWABLE IN VIEW OF THE DECISION OF THE TRIBUNAL O F MUMBAI BENCH IN THE CASE OF DAVENDRA KOTHARI (136 TTJ 188) WHERE THE TR IBUNAL HELD THAT WHEN THE ASSESSEE FAILED TO DEMONSTRATE THE NEXUS OF THE SAID EXPENDITURE WITH THE PURCHASE AND SALE TRANSACTIONS OF THE SAID CAPI TAL ASSETS IE SECURITIES, THE FEE PAID TO THE PORTFOLIO MANAGERS IS NOT AN AL LOWABLE EXPENDITURE U/S 48 OF THE ACT. 20. PER CONTRA, THE CASE OF THE ASSESSEE IS THAT TH E SAID DECISION OF THE MUMBAI BENCH TRIBUNAL IS DISTINGUISHABLE ON FACTS RELATING TO DISCHARGE OF ONUS RELATING TO NEXUS ISSUE AND ALSO IN MATTERS OF GLOBAL TURNOV ER BASED CLAIM OF FEE INCLUDING THE MISCELLANEOUS RECEIPTS SUCH AS DIVIDE NDS AND INTEREST. AS PER THE ASSESSEE, THERE ARE OTHER DECISIONS TO SUPPORT THE CLAIM OF THE ASSESSEE. FURTHER, ASSESSEES STAND IS THAT REVENUE AUTHORITI ES HAVE LISTED THREE REASONS CUMULATIVELY FOR DENIAL OF DEDUCTION IE NOT AS PER THE AGREEMENT; (II) NOT AUTHORIZED BY THE SEBI REGULATIONS, 1993 AND THEREF ORE IT ATTRACTS THE PROVISIONS OF THE EXPLANATION TO SUB-SECTION (1) OF SECTION 37 IE INFRINGEMENTS OF THE LAW, AND THE SAID REASONS DO NOT STAND THE TEST OF LEGAL SCRUTINY AS THE IT AUTHORITIES MISINTERPRETED THE FACTS. IN THIS REGAR D, THE FACTS ARE THAT THE FEE PAID TO ASSESSEE AS PER THE AGREEMENT IE AT THE EXP IRY OF THE AGREEMENT PERIOD AND EXPIRY OF THE AGREEMENT IS DIFFERENT FROM THE E XPIRY THE AGREEMENT. IN THE EARLIER CASE, THE AGREEMENT DOES NOT EXPIRE AND ONL Y THE PERIOD EXPIRES. SECONDLY, REGARDING THE ALLEGATION OF SEBI REGULATI ONS, ASSESSEES STAND IS THAT THE SAID CLAUSE 14(3) HAS BEEN AMENDED TO INCL UDE THE PAYMENT OF FEE ON PROFITS SHARING BASIS TOO. THEREFORE, THERE IS NO T INFRINGEMENT OF THE SAID CLAUSE AND CONSEQUENTLY, THE INVOKING BY THE CIT(A) OF THE PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE ACT DOES NOT AR ISE. 21. IN THE CONTEXT OF THE ABOVE RIVAL POSITIONS, WE PROCEED TO EXAMINE THE SCOPE OF THE PROVISIONS OF SECTION 48 OF THE ACT, AMENDED SEBI REGULATIONS IN MATTERS RELATING TO FEE PAYABLE TO PORTFOLIO MANAGERS, THE MATTERS RELATING TO THE DISTINGUISHING OF THE DECISIONS CITED BY THE REVENU E ETC. A. SCOPE OF THE PROVISIONS OF SECTION 48 OF THE ACT: 22. SECTION 48 PROVIDES FOR THE METHOD OF COMPUTATI ON OF CAPITAL GAINS. THE RELEVANT PROVISIONS READ AS FOLLOWS: THE INCOME CHARGEABLE UNDER THE HEAD CAPITAL GAIN S SHALL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CONSIDERATI ON RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET TH E FOLLOWING AMOUNTS, NAMELY: 8 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER, (II) THE COST OF ACQUISITION OF THE CAPITAL ASSET A ND THE COST OF ANY IMPROVEMENT THERETO. HONBLE JURISDICTIONAL HIGH C OURT HAS AN OCCASION TO EXPLAIN THE ABOVE PROVISIONS OF SECTION 48 OF THE ACT IN THE CASE OF CIT V SHAKUNTALA KANTILAL 190 ITR 56 (B OM) EXPLAINED THE SAME AND HELD THAT THE DEDUCTIBILITY OF CERTAIN EXPENDITURE MUST CONSIDERED FAVORABLY TO THE ASSESSEE AS THE PROVISI ONS OF CLAUSE (I) AND (II) ARE WIDER. AS THE HONBLE HIGH COURT, SUC H 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 CONN ECTION WITH THE TRANSFER. IN OTHER WORDS, SO LONG AS THE EXPENDITU RE IN QUESTION IS GENUINE AND ARE INCURRED IN CONNECTION WITH THE TRA NSFER OF THE SECURITIES, THE EXPENDITURE IS ALLOWABLE FROM THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING, ITSELF. MEANIN G THEREBY, THE IMPUGNED EXPENDITURE IS REDUCED FROM THE GROSS VAL UE OF THE CONSIDERATION RECEIVED OR ACCRUING, AND THE NET VA LUE OF THE CONSIDERATION RECEIVED OR ACCRUING WILL BE FURTHER REDUCED BY THE EXPENDITURE MENTIONED IN CLAUSES (I) AND (II) OF SE CTION 48 OF THE ACT. THE SECOND WAY OF DEALING WITH THE SAID GENUINE EXP ENDITURE RELATES TO THE ONE SPECIFIED IN CLAUSE (I) AND CLAU SE (II). THE ASSESSEE MUST BE GIVEN BENEFIT OF THE DEDUCTION AS THE SAME IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE TRANSFER OF THE SECU RITIES. FOR THE SAKE OF COMPLETENESS OF THIS ORDER, RELEVANT PARA 5 & 6 ARE REPRODUCED AS FOLLOWS: 5. IT MUST BE STATED IN FAIRNESS TO DR BALASUBRAMA NIAN FOR THE REVENUE THAT HE DID NOT DISPUTE THE FACT OF PAY MENT OR EVEN THE NECESSITY OF MAKING SUCH A PAYMENT. HIS CO NTENTION IS THAT THE LANGUAGE IN WHICH SECTION 48 IS COUCHED DOES NOT CONTEMPLATE DEDUCTION OF SUCH AN AMOUNT. REFERENCE IN THIS REGARD WAS MADE TO SECTION 48 OF THE ACT TO SHOW TH AT THE PAYMENT HEREIN COULD BE NEITHER BE TERMED AS EXPEND ITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE TRANSFER OR THE COST OF ACQUISITION OR OF ANY IMPROVEMENT THERETO.. 6. IN ORDER TO APPRECIATE DR SUBMISSION, IT IS D ESIRABLE TO REFER TO THE PROVISIONS OF SECTION 48 WHICH READ AS UNDER: THE SECTION (SECTION 48) BROADLY CONTEMPLATES THREE AMOUNTS FOR THE PURPOSE OF COMPUTING INCOME CHARGEABLE UNDER THE HE AD CAPITAL GAINS. THE FIRST IS THE FULL VALUE OF THE CONSIDER ATION FOR WHICH THE CAPITAL ASSET HAS BEEN TRANSFERRED. THE SECOND IS T HE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND THE THIRD AND THE LAST IS THE COST OF ACQUISITI ON OF THE CAPITAL ASSET INCLUDING THE COST OF ANY IMPROVEMENT THERETO . WE HAVE ALREADY REFERRED TO THE FACTS OF THE CASE IN DETAIL EARLIER. IT CANNOT BE DISPUTED THAT UNLESS THE ASSESSEE HAD SETTLED THE D ISPUTE WITH RADIA AND SONS (P) LTD., THE SALE TRANSACTION WITH M/S.COSMOS CO- OP HOUSING SOCIETY LTD. UNDER THE AGREEMENT DATED M ARCH 30,1967, WOULD NOT, RATHER COULD NOT, HAVE MATERIALIZED. IF THIS TRANSACTION HAD NOT MATERIALIZED THERE WOULD PERHAPS HAVE BEEN NO QUESTION OF CAPITAL GAINS. THE SALE WOULD THEN HAVE TAKEN PLACE AT THE RATE OF RS 29 PER SQ. YARD AS AGAINST RS 51 PER SQ. YARD. ONE WAY OF LOOKING AT THE PROBLEM COULD BE TO SAY THAT THE FULL VALUE OF THE CONSIDERATION IN THIS CASE WAS NOT THE APPARENT CONSIDERATION, I. E. RS2,58,672/-, BUT RS 2,23,168/- (I. E 2,58,672 MINUS RS 35,501). THE LEGISLATURE, WHILE USING THE EXPRESSION FULL VALUE OF CONSIDERA TION, IN OUR VIEW, HAS CONTEMPLATED BOTH ADDITIONS AS WELL AS DEDUCTIO NS FROM THE 9 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 APPARENT VALUE. WHAT IT MEANS IS THE REAL AND EFFEC TIVE CONSIDERATION. THAT APART, SO FAR AS CLAUSE (I) OF SECTION 48 IS C ONCERNED, WE FIND THAT THE EXPRESSION USED BY THE LEGISLATURE IN ITS WISDOM IS WIDER THAN THE EXPRESSION FOR THE TRANSFER. THE EXPRESS ION USED IS THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONN ECTION WITH SUCH TRANSFER. THE EXPRESSION IN CONNECTION WITH SUCH TRANSFER IS, IN OUR VIEW, CERTAINLY WIDER THAN THE EXPRESSION FOR THE TRANSFER. HERE AGAIN, WE ARE OF THE VIEW THAT ANY AMOUNT THE PAYME NT OF WHICH IS ABSOLUTELY NECESSARY TO EFFECT THE TRANSFER WILL BE AN EXPENDITURE COVERED BY THIS CLAUSE. IN CONCLUSION, IT IS RESPEC TFULLY SUBMITTED THAT THE FEES PAID HAVE BEEN CORRECTLY CLAIMED AS DE DUCTION IN THE COMPUTATION OF CAPITAL GAINS 23. THE SCOPE OF SECTION 48 AS PER THE BINDING JUDG MENT OF THE HONBLE HIGH COURT IS THAT THE CLAIM OF BONA FIDE OR GENUINE EXP ENDITURE 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 THE TRANSFER OF THE AS SET. IT IS NOW BINDING ON OUR PART TO TAKE THE VIEW THAT THE EXPRESSIONS IN CONN ECTION WITH HAS WIDER MEANINGS THAN THE EXPRESSION FOR THE TRANSFER. TH E REVENUES CONTENTION IS THAT THE LANGUAGE IN WHICH SECTION 48 DOES NOT CONT EMPLATE DEDUCTION OF SUCH AN AMOUNT WAS OVERRULED AND ALLOWED THE DEDUCTION O F THE FEE INCURRED BY THE ASSESSEE FOR REMOVAL OF THE ENCUMBRANCES, WHICH IS NECESSARY FOR TRANSFER OF THE ASSET IN THAT CASE. 24. WE HAVE ALSO PERUSED SOME OF THE OTHER CITATION S RELIED UPON BY THE PARTIES TO DRAW THE BOUNDARY LINES FOR THE KIND OF EXPENDIT URE WHICH FALL WITHIN THE SCOPE OF THE ALLOWABLE EXPENDITURE U/S 48 OF THE AC T IN COMPUTATION OF THE CAPITAL GAINS. WE FIND THAT ALL THESE CITATIONS INV ARIABLY FOLLOWED THE JURISDICTIONAL HIGH COURT JUDGMENT IN THE CASE OF S ANTHILAL KANTILAL (SUPRA). A. CALCUTTA HIGH COURT HELD IN THE CASE OF GOPEENAT H PAUL AND SONS & ANR (278 ITR 240) THAT WHEN ASSETS OF THE ASSESSEE GNP , EARLIER CARRYING ON BUSINESS IN THE NAME OF GSM COULD NOT BE SOLD AS GO ING CONCERN UNDER ORDERS OF COURT WITHOUT MEETING THE LIABILITIES OF GSM TOWARDS THE BANK, PAYMENTS FOR MEETING SUCH LIABILITIES OF GSM TOWARD S BANK WAS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONN ECTION WITH THE TRANSFER, HENCE DEDUCTIBLE U/S 48(I) OF THE ACT. B. AAR HELD IN THE CASE OF COMPAGNIE FINANCIERE HAM ON, IN RE (310 ITR1), THAT THE PROFESSIONAL FEE PAID TO THE LAWYERS DIST INCTLY RELATED TO AND INTEGRALLY CONNECTED WITH THE TRANSFER OF SHARES IS ADMISSIBLE FOR DEDUCTION U/S 48(I) OF THE ACT AAR HELD THAT THE WHAT IS ATT RIBUTABLE TO THE FINAL ACT OF TRANSFER OF SHARES IS ADMISSIBLE FOR DEDUCTION PROV IDED THE INTIMATE CONNECTION BETWEEN THE EXPENDITURE AND THE ACT OF T RANSFERRING SHARES IS ESTABLISHED. C. IN THE CASE OF BRADFORD TRADING CO P LTD, THE MA DRAS HIGH COURT HELD THAT THE AMOUNT PAID BY THE ASSESSEE TO A THIRD PA RTY TO SETTLE THE PRE EXISTING CLAIMS AGAINST THE TRANSFER OF THE ASSETS AS ALSO LITIGATION EXPENSES CONSTITUTED EXPENDITURE INCURRED WHOLLY AN D EXCLUSIVELY FOR TRANSFER OF CAPITAL ASSET AND WAS DEDUCTIBLE IN COM PUTATION OF CAPITAL GAINS; THE AMOUNT REIMBURSED BY VENDEE TO THE ASSES SEE TOWARDS SUCH CLAIM CONSTITUTED PART OF SALE CONSIDERATION BUT DE DUCTIBLE WHILE COMPUTING CAPITAL GAINS. D. BOMBAY HIGH COURT IN THE CASE OF ABRAR ALVI (247 ITR 312) HELD THAT THE AMOUNT PAID BY THE ASSESSEE TO HIS SON TO RESOLVE T HE PROPERTY DISPUTE WAS AN ALLOWABLE EXPENDITURE IN COMPUTING THE CAPITAL G AINS. SAME HIGH COURT IN THE CASE OF MISS PIROJA C PATEL (242 ITR 582) HE LD THAT THE COMPENSATION 10 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 PAID BY THE ASSESSEE TO THE HUTMENT DWELLERS IS AN ALLOWABLE EXPENDITURE IN COMPUTING THE CAPITAL GAINS. E. IN THE CASE OF MOTILAL KOTHARI VS DCIT (136 TTJ 188), THE MUMBAI TRIBUNAL HELD THAT THE PAYMENT OF FEE TO THE PMS TO DISCHARGE HIS CONTRACTUAL LIABILITY DID NOT AMOUNT TO DIVERSION O F INCOME BY OVERRIDING TITLE. IT IS A CASE OF APPLICATION OF INCOME. IN TH IS CASE, THE ASSESSEE CLAIMED EXPENDITURE OF THE FEE PAID TO PMS ON HIS GLOBAL TU RN OVER AND ASSESSEE FAILED TO DISCHARGE ONUS IN ESTABLISHING THE NEXUS OF THE EXPENDITURE WITH THE ASSETS TRANSFER. TRIBUNAL DID NOT REFER TO THE EXPLANATION GIVEN BY THE BINDING JURISDICTIONAL HIGH COURT ON THE PROVISIONS OF SECTION 48 OF THE ACT. 25. FROM THE ABOVE, IT IS INVARIABLY LEARNT THAT TH E SCOPE OF THE PROVISIONS OF SECTION 48 ARE EXPLAINED BY THE JURISDICTIONAL HIGH COURT AND IT IS BINDING ON US AS THEY REMAIN UNDISTURBED AS INFORMED TO US. THE C ITATION AT E ABOVE DID NOT HAVE BENEFIT OF THE SAID EXPLAINING OF THE PROVISIO NS OF SECTION 48 OF THE ACT. FOR ALLOWING THE CLAIM OF DEDUCTION IN THE COMPUTATION OF THE CAPITAL GAINS, THE EXPENDITURE HAS TO BE DISTINCTLY AND INTRICATELY LI NKED TO THE ASSET AND ITS TRANSFER AND THE ONUS IS ON THE ASSESSEE TO DEMONST RATE THE SAID LINKAGE BETWEEN THE EXPENDITURE AND THE ASSETS TRANSFER. I T IS EVIDENT AND BINDING THAT THE EXPENDITURE IF UNDISPUTEDLY, NECESSARILY AND GE NUINELY SPENT FOR THE ASSETS TRANSFER WITHIN THE SCOPE OF THE PROVISIONS OF SECT ION 48 OF THE ACT, THE CLAIM CANNOT BE DISALLOWED FOR WANT OF THE EXPRESS PROVIS IONS IN SECTION 48 OF THE ACT. 26. WHOLLY AND EXCLUSIVELY: IN THIS REGARD, IT IS A SETTLED LAW THAT THE EXPRESSION WHOLLY AND EXCLUSIVELY IS EXPLAINED FO R THE PURPOSE OF THE IDENTICAL EXPRESSIONS USED IN SECTION 37 OF THE ACT. IN THE C ASE OF SASOON J DAVID & CO P LTD V CIT 118 ITR 261(SC), HONBLE SUPREME COURT EX PLAINED THE TWIN ADVERBS STATING THAT THE FIRST ADVERB, WHOLLY REFERS TO T HE QUANTUM OF THE EXPENDITURE, THE SUM OF MONEY SPENT AND THE SECOND ADVERB EXCLU SIVELY HAS REFERENCE TO THE PURPOSE BEHIND THE EXPENDITURE AND NOT THE M OTIVE OR OBJECT OF EXPENDITURE. 27. AFTER EXPLAIN THE SCOPE OF SECTION 48 OF THE AC T, WE SHALL NOW PROCEED TO EXAMINE THE FACTS OF THE CASE IN GENERAL AND THE AP PLICABILITY OF THE PROVISIONS OF SECTION 48 IN PARTICULAR. 28. WE HAVE ALREADY DETAILED THE FACTS OF THE IMPUG NED PAYMENTS IN THE PRECEDING PARAGRAPHS. TO SUM UP THE SAME, THE UNDIS PUTED FACTS ARE: (I) THE ASSESSEE MADE THE PAYMENT OF FEE TO M/S ENAM, THE A SSET MANAGEMENT COMPANY AND THE GENUINENESS OF THE SAID PAYMENT IS UNDISPUTED; (II) THE REVENUE AUTHORITIES HAVE ALSO NOT DISPUTED THE REQU IREMENT OR NECESSITY OF THE SAID PAYMENTS; (III) QUANTITATIVELY SPEAKING IN VIE W OF THE ADVERBIAL EXPRESSION, WHOLLY USED IN SECTION 48(I) OF THE ACT, WE FIND THAT THE PAYMENT OF FEE @ 5% ONLY RESTRICTED TO THE NAV OF THE SECURITIES AND NO T ONLY THE GLOBAL TURN OVER INCLUDING THE OTHER INCOME; (IV) REGARDING THE PURP OSE OF PAYMENT IN VIEW OF THE ADVERBIAL EXPRESSION, EXCLUSIVELY USED IN SECTION 48(I) OF THE ACT, WE FIND THAT THE SAME IS INTENDED ONLY TWIN PURPOSE OF THE ACQUI SITION OF THE SECURITIES AND ALSO FOR SALE OF THE SAME; (V) THE NAV IS DEFINED I N PARA 1(D) AS THE NET ASSET VALUE OF THE SECURITIES OF THE CLIENT AND THE ASSE SSEE CALCULATED THE IMPUGNED FEE IS LINKED TO THE SECURITIES VALUE ONLY AND NOT INCLUDES OTHER INCOME SUCH INTEREST OR DIVIDEND ETC; (V) CONSIDERING THE CONTE NTS OF THE PARA 7.01(C), TERMINATION FEE UPTO 5% WILL BE PAYABLE ON THE NET ASSET VALUE (NAV) OF THE PORTFOLIO OF THE CLIENT AS ON THE DATE OF TERMINATI ON OF THE AGREEMENT PERIOD AND NOT THE AGREEMENT ITSELF AND THEREFORE PAYMENT IS P ERIOD SPECIFIC; (VI) IT IS A FACT THAT THE CLAUSE 14(3) WAS AMENDED SUBSEQUENTLY AND THEREFORE, THE ACTION OF THE REVENUE IS BASED ON THE INAPPLICABLE OR PRE-AME NDED FACTS. THE DETAILS ARE DETAILED BELOW. CLAUSE 14(3) OF SEBI (PORTFOLIO MANAGERS) RULES & R EGULATIONS 1993: 11 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 29. REVENUE IS OF THE BONA FIDE BELIEF OR OPINION T HAT THE CLAUSE 3(A) PROHIBITS THE PAYMENT OF FEE ON THE BASIS OF RETURNS SHARING BASIS AS THEY RELIED ON THE ORIGINAL CLAUSE 14(3) OF SEBI (PORTFOLIO MANAGERS) RULES & REGULATIONS 1993 WHICH GOVERNS THE PORTFOLIO MANAGER WHICH BANS THE PAYMENT OF FEE TO THE PORTFOLIO MANAGER. IN THIS REGARD, LD COUNSEL FILED A GAZETTE COPY SHOWING THE AMENDED CLAUSE 3 VIDE SEBI (PORTFOLIO MANAGERS) (AM ENDMENT) RULES, 2002 WHICH PROVIDES FOR RETURN BASED FEE ALSO. THE SAID CLAUSE ORIGINALLY CAME INTO FORCE WITH EFFECT FROM 7.1.1993, A DATE OF PUBLICAT ION IN THE OFFICIAL GAZETTE, WHEREBY THE SEBI PROVIDED FOR THE FEE RELATING TO T HE PORTFOLIO MANAGERS VIDE PARA 3(A) WHICH HAS COME INTO EFFECT W.E.F. 11.10.2 002. THE SECURITIES & EXCHANGE BOARD OF INDIA (PORTFOLIO MANAGERS) REGULA TIONS, 1993 PROVIDE THAT THE DISCRETIONARY PORTFOLIO MANAGER IS OBLIGED TO I NDIVIDUALLY AND INDEPENDENTLY MANAGE THE FUNDS OF EACH CLIENT IN ACCORDANCE WITH THE NEEDS OF THE CLIENT. THESE REGULATIONS, 1993 PROVIDE THAT FEE TO BE CHAR GED MAY BE A FIXED AMOUNT OR A RETURN BASED FEE OR A COMBINATION OF BOTH. WE HAVE EXTRACTED THE AMENDED CLAUSE 14(3) AND THE SAME IS AS FOLLOWS. (3)(A) : THE PORTFOLIO MANAGER SHALL CHARGE AN AGR EED FEE FROM THE CLIENTS FOR RENDERING PORTFOLIO MANAGEMENT SERVICES WITHOUT GUARANTEEING OR ASSURING, EITHER DIRECTLY OR INDIRECTLY, ANY RETURN AND THE FEE SO CHARGED MAY BE A FIXED FEE OR A RETURN BASED FEE OR A COMBI NATION OF BOTH. THUS, IN OUR OPINION, THE AMENDED PROVISIONS ALLOWS THE PAYM ENT OF FEE TO AMC ON RETURN BASED FEE AND THEREFORE, ALL THE THREE REA SONS OF THE REVENUE FOR DENYING THE CLAIM OF DEDUCTION IN FAVOUR OF THE ASS ESSEE, AS DISCUSSED IN THE ABOVE PARAGRAPHS OF THIS ORDER, REQUIRE TO BE R EJECTED AND IN FAVOUR OF THE ASSESSEE.CAPITAL GAINS VS DEDUCTIONS 30. WE HAVE DISCUSSED IN THE PRECEDING PARAGRAPHS T HAT THE PROFITS EARNED BY THE ASSESSEE IS CHARGEABLE TO TAX UNDER THE HEAD C APITAL GAINS. IT IS SO ORDERED BY THIS TRIBUNAL VIDE THE ORDER DT 31.8.200 9 IN CONNECTION WITH APPEALS ITA NO 499/PN/08 IN THE CASE OF ARA TRADING & INVES TMENTS P LTD. AND ITA NO 500/PN/08 IN THE CASE OF KRA HOLDING & TRADING P. L TD. RELEVANT PARA 27 OF THE SAID ORDER WAS ALREADY EXTRACTED IN THE PRECEDI NG PARAGRAPHS. IN THE LIGHT OF THE ABOVE UNDISTURBED PROPOSITION, OUR ATTENTION IS RESTRICTED TO THE LIMITED ISSUE OF IF THE IMPUGNED FEE PAID TO THE M/S ENAM I S ALLOWABLE U/S 48 OF THE ACT OR NOT. LOADING OF THE EXPENDITURE TO THE COST OF THE SHARE S, DISTINGUISHING OF THE TRIBUNALS ORDER IN THE CASE OF DEVENDRA KOTHARI (S UPRA): 31. LD DR FOR THE REVENUE RELIED ON THE ABOVE DECIS ION OF THE TRIBUNAL AND MENTIONED THAT THE ORDER OF THE CIT(A) DOES NOT CAL L FOR ANY INTERFERENCE DESPITE THE FACT THAT THE ORDER IS NOT CONSIDERED THE ABOVE CITATIONS. IN THIS REGARD, LD COUNSEL FILED AT OUR REQUEST A BRIEF NOTE ON THE IS SUE OF LOADING AND OTHER ANCILLARY ISSUES AND THE RELEVANT PORTIONS ARE IMPORTED FOR T HIS ORDER AND THE SAME ARE AS UNDER: THE METHOD OF ACCOUNTING FOLLOWED BY THE COMPANY I N RESPECT OF FEES PAID IS TO PROPORTIONATELY LOAD THESE TYPES OF FEES AS P ART OF THE PURCHASE COST OF THE SECURITIES DURING THE GIVEN PERIOD. AUTOMATICAL LY THESE FEES ARE TAKEN INTO ACCOUNT FOR COMPUTING CAPITAL GAINS OR THE CAR RYING COST OF UNSOLD INVESTMENTS. THERE IS A DIRECT AND PROXIMATE NEXUS BETWEEN THE F EES PAID AND THE PROCESS OF ACQUISITION AND SALE OF THE SECURITIES W HICH IS A CAUSATIVE FACTOR FOR MAKING CAPITAL GAINS AND THAT THE FEES ARE PAID WHOLLY AND EXCLUSIVELY FOR EARNING THE INCOME OFFERED TO TAX UNDER THE HEA D CAPITAL GAINS. RELIANCE IS PLACED ON THE DECISION IN THE CASE OF C IT V. SHAKUNTALA KANTILAL [1991] 58 TAXMAN 106/190 ITR 56 (BOM.) WHE RE IT WAS HELD THAT AMOUNT PAID FOR REMOVING AN ENCUMBRANCE WAS AL LOWABLE U/S 48(I). IN COMING TO THIS VIEW THE COURT OBSERVED THAT WITHOUT THIS PAYMENT THE SALE 12 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 COULD NOT HAVE BEEN MATERIALIZED AND HENCE THERE WO ULD HAVE BEEN NO QUESTION OF THE CAPITAL GAINS BEING BROUGHT TO TAX. IN THE PRESENT CASE THE CAPITAL GAINS HAVE ARISEN AS A RESULT OF THE EFFORT S OF THE PM FOR WHICH THE FEES HAVE BEEN PAID. A MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DAVE NDRA KOTHARI (136 TTJ 188) HAS CONFIRMED DISALLOWANCE OF PMS FEES WHI LE COMPUTING CAPITAL GAINS. IN THAT CASE FEES WERE PAID BASED ON VALUE OF THE A SSETS. THE HONOURABLE BENCH HAS OBSERVED AT PARA 7 OF THE SAID ORDER THAT THE CIT(A) FOUND THAT THE,- QUANTIFICATION OF FEES: WAS BASED ONLY ON EITHER TH E MARKET VALUE OF THE ASSET OR THE NET VALUE OF THE ASSETS OF THE ASSESSE E AS HELD EITHER AT THE BEGINNING OR AT THE END OF EACH QUARTER. AT PARA 8 OF THE ORDER, THE HONOURABLE BENCH HAS OB SERVED THAT THE CIT(A) HELD THAT THE ASSESSEE WAS PAYING THE FEES AS AFORE SAID TO PORTFOLIO MANAGERS EVEN ON THE INTEREST/DIVIDEND RECEIVED ON THE INVESTMENTS AND THEREFORE THE CIT(A) CAME TO HOLD THAT IT COULD NOT BE SAID THAT THERE WAS NEXUS BETWEEN THE PMS FEES PAID AND PURCHASE AND SA LE OF INVESTMENTS. THE HONOURABLE MUMBAI TRIBUNAL HAS LAID STRESS ON T HE SAID FINDINGS OF THE CITA. PRESENT CASE OF THE APPELLANT IS CLEARLY DISTINGUIS HABLE IN THE LIGHT OF THE FACT THAT RETURN BASED FEES IS ALSO PAYABLE IN RESP ECT 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 AN D FEES IS NOT PAID ON INTEREST AND DIVIDEND RECEIVED BY THE APPELLANT. IT IS RESPECTFULLY SUBMITTED THAT THE SAID DECISION IS NOT APPLICABLE AS IT TURNS ON ITS OWN FACTS APART FROM BEING PATENTLY WR ONG. THE ASSESSEE IN THAT KOTARIS CASE HAD FAILED TO DE MONSTRATE THE NEXUS BETWEEN THE FEES PAID AND THE ACTIVITY OF PUR CHASE AND SALE. THE ASSESSEE COULD NOT EXPLAIN HOW THE FEES PAID ON SUCH EXPLICIT BASIS COULD BE CONSIDERED DIFFERENTLY SO AS TO CONS TITUTE COST OF EITHER ACQUISITION OR AS EXPENDITURE IN CONNECTION WITH TRANSFER. THE ASSESSEE COULD NOT DEMONSTRATE HOW ALLOCATION O F FEES HAD BEEN MADE. IT COULD NOT FURNISH DETAILS OF HOW OR THE BA SIS ON WHICH ALLOCATION OF SAID FEES WAS POSSIBLE. FURTHER FEES HAD TO BE PAID EVEN WHEN NO PURCHASE O R SALE TOOK PLACE. THE CIT(A) HAD HELD THAT IT WAS NOT POSSIBLE TO BRE AK UP THE FEES SO AS TO HOLD THAT THE SAME WAS RELATABLE TO PURCHASE OR SALE OF SHARES. FURTHER, FEES WERE PAID EVEN ON INTEREST ACCRUED AN D DIVIDEND RECEIVED. THE TRIBUNAL HELD THAT THE BASIS ON WHICH FEES WERE PAID IS SUCH THAT THERE WAS NO RELATIONSHIP WITH EITHER PURCHASE OR SALE. I N VIEW OF THIS IT HELD THAT THERE WAS NO NEXUS WITH PURCHASE OR SALE. IT IS RESPECTFULLY SUBMITTED THAT THE HONOURABLE TR IBUNAL OUGHT TO HAVE INDEPENDENTLY DETERMINED WHETHER THE FEES WERE PAID FOR AN ACTIVITY WHICH 13 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 HAD A DIRECT NEXUS WITH THE PURCHASE OR SALE OF THE SHARES INSTEAD OF ALLOWING ITSELF TO BE PERSUADED MERELY BY THE DIFFI CULTY IN ALLOCATING SUCH FEES TO PURCHASES BY A DIRECTLY CONCEIVABLE BASIS. IN THE PRESENT CASE BEFORE YOU HONOURS THE ANNUAL T ERMINATION FEE IS TO BE DETERMINED WITH REFERENCE TO THE NAV OF THE PORTFOL IO WHICH HAS BEEN DEFINED TO BEEN THE MARKET VALUE OF THE SECURITIES AS ON THE RELEVANT DATE. NO FEES WERE PAID ON INTEREST ACCRUED AND DIVIDEND RECEIVED. IT IS FURTHER SUBMITTED THAT THE ACT DOES NOT DEFINE THE EXPRESSI ONS COST OF ACQUISITION OR COST OF IMPROVEMENT REFERRED TO IN SECTION 48. THESE EXPRESSIONS THUS HAVE TO BE GIVEN THEIR NATURAL COMMERCIAL MEANING A S MEN OF TRADE AND COMMERCE WOULD UNMISTAKABLY UNDERSTAND. INVESTMENTS IN SECURITIES ARE VALUED AT COST BY THE APPELLANT. IN VIEW OF THE DIRECT NEXUS BETWEEN THE FEES AND TH E 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. THE SC IN THE CASE OF BHARAT EARTH MOVERS (245 ITR 428)(SC) IN THE CONTEXT OF ALLOWABILITY OF PROVISION FOR LEAVE ENCA SHMENT REFERRED TO THE FOLLOWING PASSAGE FROM ITS DECISION IN THE CASE OF CALCUTTA CO. LTD VS. CIT (1959) 37 ITR 1 (SC) WHEREIN IT WAS HELD THAT MEREL Y BECAUSE THERE IS SOME DIFFICULTY IN THE ESTIMATION OF THE LIABILITY WOULD NOT CONVERT THE ACCRUED LIABILITY INTO A CONDITIONAL ONE; IT WAS ALWAYS OPE N TO THE TAX AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE OF THE LIA BILITY HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. IN THE PRESENT CASE MERELY BECAUSE SOME MATHEMATICA L EXERCISE IS INVOLVED IN LOADING SUCH FEES TO INDIVIDUAL TRANSACTIONS OF PURCHASE WOULD NOT MEAN THAT SUCH FEES DO NOT FORM PART OF COST OF ACQUISIT ION OR HAVE NEXUS THEREWITH ACCOUNTING STANDARD 13 (ACCOUNTING FOR IN VESTMENTS) ISSUED BY ICAI PROVIDES THAT COST OF AN INVESTMENT INCLUDES A CQUISITION CHARGES SUCH AS BROKERAGE, FEES AND DUTIES. THE METHOD OF ACCOUN TING FOLLOWED BY THE COMPANY IN RESPECT OF FEES PAID IS TO PROPORTIONATE LY LOAD THESE FEES ON THE SECURITIES HANDLED BY THE PORTFOLIO MANAGER DURING THE YEAR [I.E. OPENING PORTFOLIO PLUS INVESTMENTS MADE DURING THE YEAR]. A UTOMATICALLY THESE FEES ARE TAKEN INTO ACCOUNT FOR COMPUTING CAPITAL GAINS OR THE CARRYING COST OF UNSOLD INVESTMENTS. THE SUPREME COURT IN THE CASE OF UP STATE INDUSTRIA L DEVELOPMENT CORPORATION (225 ITR 703) WAS DEALING WITH THE CASE OF AN UNDERWRITER OF SHARES WHO HAD TO SUBSCRIBE TO SHARES IN THE EVENT OF UNDER SUBSCRIPTION BY THE PUBLIC. THE ISSUE BEFORE THE SC WAS WHETHER IN RESPECT OF SUCH DEVOLVED SHARES WHETHER THE UNDERWRITING COMMISSION RECEIVED FROM THE CLIENT, SHOULD BE TREATED AS AN ITEM OF INCOME OR A N ITEM THAT WOULD GO TO REDUCE THE COST OF ACQUISITION OF SUCH DEVOLVED SHA RES. THE SUPREME COURT, APPLYING THE WELL ACCEPTED PROPOSITION THAT FOR THE PURPOSES OF ASCERTAINING PROFITS AND GAINS ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED SO LONG AS THEY ARE NOT IN CONFLICT WITH AN Y EXPRESS PROVISION OF THE ACT UPHELD THE CONTENTION OF THE ASSESSEE WHICH IT FOUND TO BE IN CONSONANCE WITH THE GENERAL PRINCIPLES OF ACCOUNTAN CY GOVERNING UNDERWRITING CONTRACTS. IN THE PRESENT CASE SINCE THE DEPARTMENT IS NOT CON TENDING THAT THE ACCOUNTING PRACTICE FOLLOWED BY THE COMPANY IS CONT RARY TO GENERAL PRINCIPLES OF ACCOUNTANCY GOVERNING PM CONTRACTS TH E ABOVE RATIO WOULD SQUARELY APPLY. AS A MATTER OF FACT THE LOWER AUTH ORITIES HAVE NOT DISPUTED THE CORRECTNESS OF THE METHOD OF ALLOCATION OF PMS FEES OR FOUND IT CONTRARY TO ACCOUNTING PRACTICE. 14 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 THE HONBLE PUNE TRIBUNAL IN CASE OF S.BALAN (308 I TR 151 (T PUNE) HELD THAT INTEREST PAID ON MONIES BORROWED FOR ACQUISITI ON OF SHARES WOULD FORM PART OF COST OF ACQUISITION. UNDOUBTEDLY LOADING INTEREST ON INDIVIDUAL TRANSACT ION OF PURCHASE WOULD NECESSARILY INVOLVE AN EXERCISE OF ALLOCATION WHICH DID NOT DETER THE PUNE TRIBUNAL FROM UPHOLDING THE CLAIM. THE HONBLE PUNE TRIBUNAL OBSERVED THAT INTEREST HAVING NEXUS WITH THE COST OF ACQUISI TION HAS TO BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF COMPUTATION OF CAPITAL G AINS PRESCRIBED U/S 48 (II). THE HONBLE BENCH INTER ALIA REFERRED TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MITHILESH KUMARI RE PORTED IN 92 ITR 7 AND THE OBSERVATION OF THEIR LORDSHIPS THAT- IT WILL NOT MAKE ANY DIFFERENCE WHETHER THE INTERES T WAS PAID ON THE DATE OF PURCHASE OR WHETHER IT IS PAID SUBSEQUENTLY TO EXCLUDE THE INTEREST AMOUNT FROM THE ACTUAL COST WOULD LEAD TO ANOMALOUS RESULTS. IN THE CASE OF CHALLAPALLI SUGARS LTD (98 ITR 167) THE SC HELD THAT INTEREST PAID ON BORROWED MONEY FOR PURCHASING PLANT AND MACHINERY BEFORE COMMENCEMENT OF PRODUCTION WOULD F ORM THE PART OF ACTUAL COST FOR THE PURPOSE OF DEPRECIATION ALLO WANCE. IT HELD SO FOLLOWING THE ACCEPTED ACCOUNTANCY RULE FOR DETERMI NING THE COST OF FIXED ASSETS. IN THIS CASE PREOPERATIVE INTEREST WOULD HAVE TO BE ALLOCATED TO THE COST OF INDIVIDUAL FIXED ASSETS ACQUIRED DURING CON STRUCTION PERIOD OF A NEW COMPANY (THIS WAS BEFORE THE BLOCK OF ASSETS CONCEPT WAS INTRODUCED) AND YET THE COURT HELD SO. BY THE SAME LOGIC EXPENSES INCURRED IN RELATION TO THE PORTFOLIO SHOULD BE ALLOWED TO BE CAPITALIZED IN TERMS OF AS 13. IT WILL BE APPRECIATED FROM THE SUBMISSIONS MADE AB OVE THAT THIS IS NOT SO IN THE PRESENT CASE WHERE A LIVE NEXUS HAS B EEN CLEARLY ESTABLISHED AND ON THAT BASIS EVEN THE ACCOUNTS HAV E BEEN MAINTAINED; INVESTMENTS HAVE BEEN ACCOUNTED FOR INC LUSIVE OF PROPORTIONATE FEES AND SAID FEES ARE ALSO LOADED TO UNSOLD INVESTMENTS AS AT THE YEAR END. IT IS RESPECTFULLY SUBMITTED THAT IN THE PRESENT CA SE ASSESSEE HAS DEMONSTRATED HOW THERE IS A NEXUS BETWEEN THE FEES AND THE ROLE OF THE PM DIRECTLY AFFECTING PURCHASES AND HENCE COST OF ACQUISITION. 32. FROM THE ABOVE, IT IS EVIDENT THAT THE UNLIKE I N THE TRANSACTIONS INVOLVING ACQUISITION AND SALE OF THE LAND BUILDINGS, THE LOA DING OF THE EXPENSES IE FEE PAID TO THE AMC IS DONE IN ACCORDANCE WITH THE AS-1 3 IE COST OF AN INVESTMENT INCLUDES ACQUISITION CHARGES SUCH AS BROKERAGE, FEE S AND DUTIES. FURTHER, ONCE THE LIABILITY TO INCUR IS CERTAIN THE QUANTIFICATIO N DOES NOT BAR THE ASSESSEE FROM CLAIMING THE EXPENDITURE. THE CLAIM OF THE ASSESSEE MUST BE ALLOWED ONCE THE BASIS OF QUANTIFICATION IS SCIENTIFIC AND REASONABL E. THE METHOD OF ACCOUNTING FOLLOWED BY THE COMPANY CONSISTENTLY IN RESPECT OF FEES PAID IS TO PROPORTIONATELY LOAD THESE FEES ON THE SECURITIES H ANDLED BY PORTFOLIO MANAGER DURING THE YEAR. FINDINGS OF THE TRIBUNAL 33. THUS, THE ISSUE FOR ADJUDICATION RELATES IF THE PAYMENT OF FEE PAID TO THE PORTFOLIO MANAGER IE ENAM FOR THE TWIN PURPOSES OF (I) PURCHASE OF INVESTMENTS/SECURITIES AND (II) SALE OF THE SAME IS AN ALLOWABLE DEDUCTION U/S 48 OF THE ACT OR NOT. THE SAME HAS TO BE DECIDED IN THE CONTEXT OF SETTLEMENT OF THE DISPUTES RELATING TO CORRECT HEAD OF INCOME. IN OTHER WORDS, THE ISSUE 15 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 RELATING TO HEAD OF INCOME FOR TAXING THE GAINS O N SALE OF THE SAID INVESTMENTS/SECURITIES HAS BEEN DECIDED BY THE TRIB UNAL IN THE FIRST ROUND OF THE APPEALS AND THE TRIBUNAL HELD THAT THE PORTFOLI O INVESTMENT IS NOT THE BUSINESS ACTIVITY BUT IT IS AN INVESTMENT ACTIVITY & RELEVANT GAINS ARE TAXABLE UNDER THE HEAD CAPITAL GAINS AS ACCOUNTED BY THE ASSESSEE. IT IS SO HELD IN THE OWN CASE OF THE ASSESSEE VIDE 499 & 500/P/2008 AND THE SAME AFFIRMED BY A DECISION OF THE TRIBUNAL-MUMBAI BENCH VIDE I.T.A NO . 5382 MUM/2009 DATED 30TH NOVEMBER, 2010 IN THE CASE OF RADHA BIRJU PATE L. THUS, IT IS THE SETTLED POSITION AT THE LEVEL OF THE TRIBUNAL THAT THE PORT FOLIO MANAGEMENT ACTIVITY IS AN INVESTMENT ACTIVITY AND NEITHER THE BUSINESS ACTIVI TY NOR THE ACTIVITY AMOUNTING TO AN ADVENTURE IN THE NATURE OF TRADE. THEREFORE , THE SECURITIES IN QUESTION ARE HELD TO BE THE INVESTMENTS BY THE TRIBUNAL IN THE FI RST ROUND AND CONSEQUENTLY, WHEN SUCH SECURITIES ARE TRANSFERRED BY WAY OF SALE , THE RESULTANT GAINS HAVE TO BE DEALT WITH AS PER THE PROVISIONS OF SECTION 4 8 OF THE ACT. 34. THE PROVISIONS OF SECTION 48 OF THE ACT HAVE AL READY BEEN ANALYSED IN THE PRECEDING PARAGRAPHS IN THE LIGHT OF THE EXPLAINING BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF SHANTILAL KANTILAL (SUPRA). IT IS A SETTLED ISSUE NOW AT THE LEVEL OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF SHANTILAL KANTILAL (SUPRA) THAT THE RIGHTFUL EXPENDITURE INCURRED IN CONNECTIO N WITH THE TRANSFER OF THE CAPITAL ASSET/SECURITIES SHOULD BE ALLOWED NOTWITHS TANDING THE INADEQUACY OF THE EXPRESS PROVISIONS OF SECTION 48 OF THE ACT. IT IS ALSO BINDING ON US TO INTERPRET THE SAID PROVISIONS OF SECTION 48 THAT TH E SAME ARE READ DOWN BY THE HONBLE HIGH COURT IN THAT CASE AND THE SAME REMAIN S UNDISTURBED TILL DATE. CONSEQUENTLY, THE EXPENDITURE WHICH IS DISTINCTLY A ND DIRECTLY CONNECTED TO THE TRANSFER, WHICH IS INTERPRETED TO BE OF WIDER MEANI NG AND CONNOTATION, ARE REQUIRED TO BE ALLOWED. WE ALSO INTERPRETED IN THE PRECEDING PARAGRAPHS THAT THE EXPRESSION WHOLLY AND EXCLUSIVELY IN CONNECTIO N WITH SUCH TRANSFER AS WIDER IN SCOPE AND IN OUR OPINION, IT IS NO SO NARR OW TO NOT TO ACCOMMODATE THE PORTFOLIO FEE, WHICH IS PAID UNDISPUTEDLY AND OBV IOUSLY FOR ACQUISITION AND SALE OF THE SECURITIES/UNIT IF ANY. THEREFORE, WE A RE OF OPINION THAT THE IMPUGNED EXPENDITURE IS (I) DIRECTLY CONNECTED TO T HE 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 ARMS LENGTH PRINCIPLE SINCE THE 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 INV ESTMENT ACTIVITY; AND (V) READ DOWN PROVISIONS OF SECTION 48 OF THE ACT IN VI EW OF THE SAID RATIO IN THE CASE OF SHANTILAL KANTILAL (SUPRA) ACCOMMODATE THE CLAIM OF SUCH EXPENDITURE LEGALLY. 35. FURTHER, THE DECISION OF THE TRIBUNAL IN THE CA SE OF DEVENDRA KOTHARI (SUPRA), WHICH WAS HEAVILY RELIED UPON BY THE LD DR FOR THE REVENUE UNFORTUNATELY DID NOT REFER TO THE SAID READ DOWN INTERPRETATION IN THE CITED JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF THE SHANTILAL KANTILAL (SUPRA). IN ANY CASE, WE FIND THE SAID ORDER OF THE TRIBUNAL IS DISTINGUISHABLE ON FACT IN GENERAL AND THE DISCHARGING OF THE ONUS OF THE ASSESSEE IN DEMONSTRATING THE DIRECT LINKAGE OF THE EXPENDITURE TO THE SHARES AS WELL AS THE CLAIM OF FEE ON THE ENTIRE TURNOVER ON GLOBAL BASIS IE NOT RESTRICTED TO INVESTMENTS ONLY. AS SUCH, IT IS A SETTLED ISSUE TH AT THE EXPRESSION IN CONNECTION WITH SUCH TRANSFER ENJOYS MUCH WIDER ME ANING AND THEREFORE, THE FEE PAID TO THE PORTFOLIO MANAGER IN OUR OPINION HA S TO BE CONSTRUED TO HAVE BEEN EXPENDED FOR THE PURPOSES OF ACQUISITION AND T RANSFER OF THE INVESTMENT OF THE SECURITIES. CONSEQUENTLY, ADJUDICATION OF THE I SSUE OF ALLOWABILITY OF THE SAID EXPENDITURE UNDER CLAUSES (I) OR (II) OF SECTI ON 48 OF THE ACT IS MERELY AN ACADEMIC EXERCISE. THEREFORE, CONSIDERING THE FACT THERE IS NO SUCH SPECIFIC ISSUE RAISED BEFORE US IN THE GROUNDS, WE REFRAIN F ROM ENTERING INTO THAT ZONE IN THIS ORDER. IT IS ALSO RELEVANT TO MENTIONED THAT T HE ON FACTS, THE EXPENDITURE IS FOR THE TWIN PURPOSE OF ACQUISITION AND SALE OF THE SECURITIES AND HENCE, IT CANNOT BE HELD THE WHOLE OF THE IMPUGNED EXPENDITUR E IS SPENT FOR TRANSFER OF ASSET OR IT SHOULD BE LOADED TO THE COST OF THE SEC URITIES. 16 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 36. NON-ALLOCABILITY OF THE EXPENDITURE: IT IS AN A GREED POSITION BETWEEN THE PARTIES THE PAYMENT OF THE PORTFOLIO MANAGEMENT FEE WAS PAID TO M/S ENAM AND OTHERS AND THE SAME IS IN ACCORDANCE WITH THE C ONTENTS OF THE BILATERAL AGREEMENT. THE SERVICES RENDERED BY M/S ENAM ARE AL SO UNDOUBTED. THE TWIN SERVICES RELATING TO THE SAID PORTFOLIO MANAGEMENT INCLUDE (I) ACQUISITION OF SECURITIES FOR THE ASSESSEE-CLIENT AND (II) SALE OF THE SAID SECURITIES FOR THE ASSESSEE-CLIENT. THE PAYMENT OF FEE IS UNDISPUTEDLY UNSPECIFIC TO THE INDIVIDUAL SHARES/SECURITIES. IN FACT, THE REVENUE TAKES AN AR GUMENT BEFORE US THAT TO BECOME THE PART OF THE COST OF THE ACQUISITION OF T HE ASSET, THE EXPENDITURE IE FEE PAID THE ENAM, HAS TO BE ASSET-SPECIFIC OR SHARE-SP ECIFIC PER THE PROVISIONS OF SECTION 48 OF THE ACT. IN OUR OPINION, THE SAME IS ABSURD GIVEN THE FACTS OF THE CASE WHERE THE PORTFOLIO INVESTMENT ATTRACTS THE PR OVISIONS OF SECTION 48 OF THE ACT AND THE ASSET INVOLVED IS NOT LAND OR BUILDING AND IN FACT THE ASSETS INVOLVED ARE THE SECURITIES/SHARES/MUTUAL FUNDS ETC . IN MATTERS OF TRANSACTIONS INVOLVING SECURITIES/SHARES/MUTUAL FUNDS ETC, EXPEN DITURE/FEE PAID TO PORTFOLIO MANAGER IS NEVER EACH SHARE SPECIFIC AND IN FACT TH EY ARE PAID ON VOLUME BASED. THEREFORE, THE REVENUES ARGUMENT HAS TO BE REJECTED ON THE GROUND OF IMPRACTICABILITY OR NON-EXISTENT IN THIS LINE OF IN VESTMENT ACTIVITY ALONE. CONSIDERING THE GENUINENESS AND ESSENTIALITY OF THE PAYMENT OF FEE TO THE PORTFOLIO MANAGER IE ENAM AND UNDISPUTEDLY FOR THE PREDOMINANTLY FOR THE SAID TWIN PURPOSES OF ACQUISITION AND SALE OF THE SECURI TIES, THE CLAIM HAS TO BE ALLOWED. FURTHER, IT IS AN ADMITTED FACT THAT THE B IFURCATION OF EXPENDITURE IS NOT POSSIBLE IN THE GIVEN FACTS OF THE CASE AND THE PAY MENT IS FOR COMPOSITE SERVICES, WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER OF THE TRANSFER OF THE SECURITIES. THE EXPENDITURE IS UNDISPUTEDLY FO R THE TWIN PURPOSES OF ACQUISITION OF THE SECURITIES AND THE SALES OF THE SAME. THE EXPENDITURE IS ARRIVED AT ON PROFITS SHARING BASIS, WHICH IS NOW A LLOWABLE BASIS BY THE SEBI. THE EXPENDITURE IS COMPOSITE ONE AS IT IS FOR THE B OTH THE PURPOSES. THERE IS NO BIFURCATION EITHER BY THE ASSESSEE OR BY THE REVENU E. IN OUR OPINION, THERE IS NO REQUIREMENT OF BIFURCATION OF THE EXPENDITURE IE A SEGMENT TO FORM PART OF THE COST OF ACQUISITION AND OTHER SEGMENT RELATING TO T RANSFER OF SECURITIES TO REDUCE THE PROFITS AS IT IS NOT THE CASE OF THE REVENUE TH AT IT SHALL MAKE SOME DIFFERENCE FROM THE TAX POINT OF VIEW. THEREFORE, WE RESIST FR OM ENTERING INTO THAT CONTROVERSY. 37. NEXT, WE PROCEED TO EXPLAIN THE EXPRESSION SUC H TRANSFER USED IN SECTION 48 OF THE ACT. THE EXPRESSION TRANSFER IS DEFINED SECTION 2(47) OF THE ACT AND IT IS AN INCLUSIVE ONE. HOWEVER, THERE IS NO EXPLANATI ON AS TO FROM WHICH POINT THE CONCEPT OF TRANSFER BEGINS. DOES IT START FROM TH E POINT OF ACQUISITION OF THE ASSET/SHARE? THUS, IN OUR OPINION, THE EXPRESSION TRANSFER INVOLVES VARIOUS SUBCOMPONENTS AND THE FIRST SUB-COMPONENT MUST OF P URCHASE AND POSSESSION OF THE IMPUGNED SECURITIES. UNLESS THE ASSESSEE IS IN POSSESSION OF THE ASSET, HE CANNOT TRANSFER THE SAME. THEREFORE, THE EXPRESS ION EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRA NSFER READ WITH AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET MENTIONED IN SECTION 48 AND 48(I) OF THE ACT MUST NECESSARILY ENCOMPASSES THE TRANSFER INVOLVED IN THE STAGE OF ACQUISITION OF THE SECURITIES TILL THE STAGE OF TRANSFER INVOLV ED IN THE STEP OF SALE OF THE IMPUGNED SECURITIES. SUCH AN INTERPRETATION OF SEC 48 OF THE ACT IS THE NECESSITY HERE TO AVOID THE LIKELY ABSURDITY. 38. IN THE PECULIAR CIRCUMSTANCES OF THE PRESENT CA SE, IN OUR CONSIDERED OPINION THE CLAIM OF THE MUST NOT BE REJECTED FOR WANT OF T HE EXPRESS PROVISIONS IN SECTION 48 OF THE ACT AND SUCH AN INTERPRETATION GO ES WITH THE SPIRIT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF M/S SHAKUNTHALA KANTILAL (SUPRA). FURTHER, AS PER THE PRINCIPLES OF ACCOUNTING IE AS-13, AS DISCUSSED ABOVE, THE EXPENDITURE OF THIS KIND IS AL LOWED TO BE LOADED TO THE COST OF ACQUISITION OF THE SECURITIES. THEREFORE, I N PRINCIPLE, THE CLAIM OF THE ASSESSEE IS ALLOWABLE UNDER THE PROVISIONS OF SECTI ON 48 OF THE ACT. HONBLE SUPREME COURT IN THE CASE OF UP STATE INDUSTRIAL DE VELOPMENT CORPORATION (225 ITR 703) WAS DEALING WITH THE ISSUE OF LOADING OF A N UNDERWRITER COMMISSION TO THE COST OF SHARES, HELD THAT THE GENERAL PRINCIPLE S OF ACCOUNTING HAVE TO BE 17 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 OBSERVED. REGARDING THE OBJECTIONS OF THE REVENUE R EGARDING THE QUANTIFICATION OF THE CLAIMS OF EXPENDITURE, IN OUR OPINION, THE J UDGMENTS OF THE SUPREME COURT IN THE CASES OF BHARAT EARTH MOVERS LTD (SUPRA) AND THE CALCUTTA CO LTD (SUPRA) HELPS THE ASSESSEE AND THEREFORE, THE CLAIM OF THE ASSESSEE IS ALLOWABLE. ACCORDINGLY, RELEVANT GROUND RELATING TO THE SECOND ISSUE. 12. WE, THEREFORE, FIND NO REASON TO TAKE A DIFFERE NT VIEW BUT TO GO WITH THE DECISION OF THE ITAT, PUNE IN THE CASE OF ASHA PARAKH (SUPRA) AND ALLOW THE CLAIM OF THE ASSESSEE. ACCORDINGLY, THE GROUND S TAKEN BY THE ASSESSEE IN C.O. ARE ALLOWED. ITA NO. 1396/PN/2011 AND CROSS OBJECTION NO. 104/PN /2011 13. IN THIS CASE ALSO, THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER OF THE LD CIT(A) II, PUNE DATED 23 RD AUGUST 2010 FOR THE A.Y. 2008-09. THE FIRST ISSUE ARISES FOR OUR CONSIDERATION IS WHETHER THE LD CIT(A) JUSTIFIED IN HOLDING THAT THE GAINS FROM THE TRANSACTIONS OF THE SHARES THROUGH THE PMS IS TO BE ASSESSED AS SHORT TERM CAPITAL GAIN TO THE EX TENT OF RS. 26,66,990/- AND THE LONG TERM CAPITAL GAIN TO THE EXTENT OF RS . 23,08,662/- AND THE SAID GAIN OR PROFITS CANNOT BE ASSESSED AS A BUSINE SS INCOME. THE EFFECTIVE GROUND ON THIS ISSUE IS GROUND NO.3 WHICH READS AS UNDER : 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) GROSSLY ERRED IN NOT APPRECIATING THAT THE GAINS OF RS. 26,66,990/- SHOWN AS SHORT TERM CAPITAL GAIN AND RS. 23,08,662/- SHOWN AS LONG TERM CAPITAL GAIN WAS EARNED FROM TRADING IN SHARES, AND, THEREFORE, SUCH GAINS HAD BEEN RIGHTLY ASSESSED UNDER THE HEAD PROFITS AND GAINS OF BUSIN ESS OR PROFESSION. 14. THE ASSESSEE IS A DIRECTOR IN PARAKH OIL LTD. THE ASSESSEE HAS ENTERED INTO PORTFOLIO MANAGEMENT SERVICES (PMS) WITH ENAM ASSET MANAGEMENT CO. LTD. (IN SHORT ENAM) TO WHOM THE ASSESSEE HAS ENTRU STED FUNDS WHICH WERE INVESTED IN THE STOCK MARKET. THE ASSESSEE HAS MAD E GAIN TO THE EXTENT OF RS. 61,15,662/-. THE ASSESSEE DECLARED THE PROFITS /GAIN ON THE SHARE TRANSACTIONS THROUGH THE PMS SERVICE PROVIDER ENAM AS A CAPITAL GAIN AND ACCORDINGLY OFFERED THE SAME AS SHORT TERM CAPITAL GAIN (STCG) AS WELL AS LONG TERM CAPITAL GAIN (LTCG) ON THE BASIS OF THE H OLDING PERIOD. THE ASSESSEE PAID THE TAX AT THE RATE OF 10% ON THE EARNING ON THE SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN WAS CLAIMED AS EXEMPT U/S. 10(38) OF THE I.T. ACT. THE A.O DID NOT AGREE WITH THE CO NTENTION OF THE ASSESSEE AND HELD THAT THE ASSESSEE HAD FREQUENTLY ENTERED I NTO TRANSACTIONS OF PURCHASE AND SALE OF SHARES AND THAT INDICATED THE INTENTION OF THE ASSESSEE TO TRADE IN THE SHARES. THE A.O. ALSO TOOK INTO AC COUNT OTHER FACTS SUCH AS 18 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 OUTSOURCING OF CERTAIN ACTIVITIES OF SHARE TRADING TO THE PMS PROVIDER, PAYMENT OF FEES TO THE PMS ETC., AS PER THE A.O, THE SHARE TRANSACTIONS ENTERED INTO THROUGH THE ENAM WHICH WAS THE PMS, WE RE IN THE NATURE OF THE BUSINESS TRANSACTIONS AND HENCE, THE GAIN/PROFIT ON THE SAID SHARE TRANSACTIONS CANNOT BE ASSESSED UNDER THE HEAD CAP ITAL GAIN. THE A.O, THEREFORE, TREATED THE ENTIRE GAIN/PROFIT ON THE SH ARE TRANSACTIONS THROUGH THE ENAM WHICH WAS THE PMS PROVIDER, AS A BUSINESS INCOME AND BROUGHT TO TAX. THE LD CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE THAT ASSESSEE IS ONLY INVESTOR AND CANNOT BE TREATED AS THE TRADER. HE, THEREFORE, DIRECTED THE A.O TO ASSESS THE PROFIT/GAIN FROM THE SHARE TR ANSACTIONS UNDER THE HEAD CAPITAL GAIN. BEING AGGRIEVED, NOW THE REVENUE I S IN APPEAL BEFORE US. 15. WE HAVE HEARD THE PARTIES. THE LD. COUNSEL SUB MITS THAT IN THE ASSESSEES OWN CASE IN THE IMMEDIATE PRECEDING YEA R I.E. A.Y. 2007-08, ON THE IDENTICAL SET OF FACTS, THE A.O. HAS TAKEN A DI FFERENT VIEW AND ASSESSED THE GAINS FROM THE SHARE TRANSACTIONS AS A BUSINES S INCOME REJECTING THE CONTENTION OF THE ASSESSEE THAT THE SAID GAIN HAD T O BE ASSESSED UNDER THE HEAD CAPITAL GAIN. HE SUBMITS THAT THE LD CIT(A) REVERSED THE ORDER OF THE A.O AND HELD THAT THE GAINS/PROFITS ON THE SHARE TR ANSACTIONS ARE TO BE ASSESSED AS A CAPITAL GAIN ONLY. THE REVENUE CARRI ED THE MATTER BEFORE THE TRIBUNAL BY FILING THE APPEAL BEING ITA NO. 630/PN/ 2011 VIDE ORDER DATED 31 ST AUGUST 2012, THE HONBLE TRIBUNAL CONFIRMED THE OR DER OF THE LD CIT(A). HE PLEADED THAT AS THE ISSUE IS IDENTICAL, THE APPE AL FILED BY THE REVENUE MAY BE DISMISSED ON THIS ISSUE. THE LD COUNSEL FIL ED THE COPY OF THE TRIBUNAL ORDER WHICH IS PLACED ON RECORD. WE HAVE ALSO HEARD THE LD. D.R., WHO FAIRLY CONCEDED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AS SUBMITTED BY THE LD COUNSEL. 16. IN THE CASE OF ASHA PAREKH (SUPRA) IN THE A.Y. 2007-08, THE ISSUE HAS BEEN EXAMINED BY THE TRIBUNAL ON IDENTICAL SET OF F ACTS AND HELD AS UNDER : 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHAL F OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND UND ER IDENTICAL FACTS & CIRCUMSTANCES THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. KRA H OLDING AND TRADING PVT. LTD. (WHEREIN BOTH OF US ARE PARTIES) VIDE ITA NO. 356/PN/2011 ORDER DATED 25-07-2012 FOR ASSESSMENT YEAR 2007- 08 HAS UPHELD THE ORDER OF THE CIT(A) WHEREIN GAIN ON SALE OF SHARES AND MUTUAL FUNDS WAS HELD AS SHORT TERM AND LONG TERM CAPITAL GAIN BY THE CIT (A). THE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 5 OF THE ORDER READS AS UNDER : 5. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE PARTIES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE 19 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 ASSESSEE. WE HAVE ALSO GONE THROUGH THE DECISION O F THE TRIBUNAL IN ASSESSEES OWN CASE. BOTH THE PARTIES FAIRLY CONCEDED THAT TH E ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2004-05. WE FIND THE TRIBUNAL IN ASSESSEES OWN CA SE FOR A.Y. 2004-05 VIDE ITA NO. 500/PN/08 ORDER DATED 31-08-2009 ALLOWED THE CL AIM OF SHORT TERM CAPITAL GAIN AND LONG TERM CAPITAL GAIN ON SALE OF SHARES A ND REDEMPTION OF MUTUAL FUNDS. WE FIND FOLLOWING THE SAID DECISION THE TRIB UNAL VIDE ITA NO. 1320/2008 AND ITA NO. 434/2009 ALLOWED THE CLAIM OF SHORT TER M CAPITAL GAIN AND LONG TERM CAPITAL GAIN FOR A.Y. 2005-06 AND 2006-07. ALTHOUG H THE DEPARTMENT HAS CHALLENGED THE ORDER OF THE TRIBUNAL BEFORE THE HON BLE HIGH COURT ON THIS ISSUE AND THE HONBLE HIGH COURT HAS ONLY ADMITTED THE AP PEAL, HOWEVER NO DECISION REVERSING THE DECISION OF THE TRIBUNAL WAS FILED BE FORE US. THEREFORE, RESPECTFULLY FOLLOWING THE DECISIONS OF THE TRIBUNAL IN ASSESSEE S OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE AGAINST THE ORDER OF THE TRIBUNAL WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSU E. GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 6.1 DESPITE HIGH VOLUME, FREQUENCY AND ORGANISED AC TIVITY IN PURCHASE & SALE OF SHARES, PROFIT FROM SUCH PURCHASE & SALE OF SHARES IS BEING TREATED AS SHORT TERM CAPITAL GAIN OR LONG TERM CAPITAL GAIN AS THE CASE MAY BE BY THE COORDINATE B ENCHES OF THE TRIBUNAL. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNA L IN THE CASE OF KRA HOLDING AND TRADING PVT. LTD. (SUPRA) AS WELL AS THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE CASE OF GOPAL PUROHIT (SUPRA) WE UPHOLD THE ORDER OF THE CIT(A) IN TREATI NG SUCH PROFIT FROM PURCHASE AND SALE OF SHARES AS CAPITAL GAIN. THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE ARE ACCORDINGLY DISMISSED. 17. AS THE FACTS ARE IDENTICAL IN THIS YEAR, WE FIN D NO REASON TO TAKE THE DIFFERENT VIEW AND ACCORDINGLY, CONFIRM THE ORDER O F LD CIT(A) AND RELEVANT GROUNDS TAKEN BY THE REVENUE ARE DISMISSED. 18. THE NEXT ISSUE IS DISALLOWANCE U/S. 14A OF THE ACT MADE BY THE A.O. AND THIS ISSUE ARISES FROM GROUND NO. 11. 11. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) OUGHT TO HAVE CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER U/S 14A OF THE INCOME-TAX ACT, 1961 R.W.R. 8D OF THE IN COME-TAX RULES, 1962 INSTEAD OF HOLDING THAT NO EXPENSES REMAINED T O BE DISALLOWED BY APPLYING AFORESAID SECTION/RULE. 19. WE HAVE HEARD THE PARTIES. THE A.O. HAS OBSERV ED THAT THE ASSESSEE HAD RECEIVED DIVIDEND THROUGH PMS I.E. ENAM TO THE EXTENT OF RS. 64,460/- WHICH WAS CLAIMED AS EXEMPT. THE A.O. MADE THE DISA LLOWANCE TO THE EXTENT OF RS. 24,080/- OUT OF THE FEES PAYMENT MADE TO ENA M ON THE REASON THAT SAID EXPENDITURE IS RELATED FOR EARNING THE EXEMPTE D INCOME. THE A.O. ALSO MADE THE DISALLOWANCE U/S. 14A TO THE EXTENT OF RS. 4,28, 208/- BY APPLYING THE PROVISIONS OF RULE 8D. THE LD CIT(A) CONFIRMED THE ACTION OF THE A.O. FOR MAKING THE DISALLOWANCE BY EVOKING THE PROVISIONS O F SEC. 14A R.W. RULE 8D. THE A.O. WORKED OUT THE DISALLOWANCE BY CONSIDERING THE INVESTMENT AS ON 20 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 1.4.2007 AND AS ON 31.3.2008 WHICH ARE RS. 8,18,73, 551/- AND RS. 8,96,09,711/- RESPECTIBELY. THE A.O. WORKED OUT TH E AVERAGE AND APPLYING THE RATE OF 0.5% WORKED OUT THE DISALLOWANCE AT RS. 4,28,208/-. WE HAVE ALREADY HELD THAT THE GAIN/PROFIT FROM THE SHARE T RANSACTIONS BY ENGAGING THE PMS PROVIDER IS TO ASSESS AS A CAPITAL GAIN. T HE ENTIRE CAPITAL GAIN IS NOT TAXABLE. ONLY THE SHORT TERM CAPITAL GAIN IS TAXAB LE. SO FAR AS THE LONG TERM CAPITAL GAIN IS CONCERNED, THE SAME IS CLAIMED AS EXEMPT U/S. 10(38) OF THE ACT. HENCE, PROVISIONS OF SEC. 14A ARE APPL ICABLE AND DISALLOWANCE HAS TO BE WORKED OUT APPLYING RULE 8D OF THE I.T. R ULES. WE, ACCORDINGLY, SET ASIDE THE ISSUE OF THE 14A TO THE FILE OF THE A.O TO WORK OUT THE DISALLOWANCE U/S. 14A R.W.R. 8D OF THE I.T. RULES TO THE FILE OF A.O., MORE PARTICULARLY, WHICH IS INCURRED IN RELATION TO LONG TERM CAPITAL GAIN CLAIMED EXEMPT. NEEDLESS TO SAY THE A.O SHOULD GIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN THE RESULT, GROUND NO. 11 IS ALLOWED F OR THE STATISTICAL PURPOSES. 20. SO FAR AS THE ASSESSEES CROSS OBJECTION IS CON CERNED, THE ASSESSEE HAS TAKEN THE FOLLOWING EFFECTIVE GROUNDS : 1] THE LEARNED CIT(A) ERRED IN HOLDING THAT THE EXP ENDITURE INCURRED IN THE FORM OF FEES AND OTHER PAYMENTS TO PORTFOLIO MANAGEMENT SERVICES (PMS) PROVIDERS WOULD NOT BE AL LOWED AS AN EXPENDITURE WHILE COMPUTING THE CAPITAL GAINS. 2] THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE PAYMENT MADE TO PMS PROVIDERS WAS EXPENDITURE INCURRED WHOLLY AN D EXCLUSIVELY IN CONNECTION WITH TRANSFER AND THEREFORE, THE CLAIM W AS ALLOWABLE. 3] WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LEAR NED CIT(A) ERRED IN NOT APPRECIATING THAT THE AMOUNT PAID TO P MS PROVIDERS OUGHT TO HAVE BEEN REDUCED FROM THE SALE CONSIDERATION WH ILE COMPUTING CAPITAL GAINS. 21. THE GRIEVANCE OF THE ASSESSEE IS THAT THE FEES PAID TO THE PMS PROVIDER I.E. ENAM MAY BE ALLOWED AS EXPENDITURE WHILE COMPU TING CAPITAL GAIN. THIS ISSUE HAS ALREADY BEEN CONSIDERED BY THE TRIBUNAL I N ASSESSEES OWN CASE IN THE A.Y. 2007-08 AND THE SAID DECISION IS FOLLOWED BY US WHILE DECIDING THE APPEAL IN THE CASE OF SMT. ASHA PARAKH, ITA NO. 139 5/PN/2011. FOLLOWING THE REASONS AND FINDINGS OF THE TRIBUNAL IN THE ASS ESSEES OWN CASE IN A.Y. 2007-08, WE HOLD THAT THE FEES PAID FOR PORTFOLIO M ANAGEMENT SERVICES IS ALLOWABLE EXPENDITURE AS A DEDUCTION WHILE COMPUTIN G CAPITAL GAIN SUBJECT TO THE DISALLOWANCE, IF ANY, MADE BY THE A.O. U/S. 14A R.W.R. 8D OF THE I.T. 21 ITA NOS. 1395, 1396/PN/2011 & C.O. NOS. 103 & 104/PN/2011,SMT. ANJU SURESH PARAKH ETC., A.Y.2008-09 RULES AS THE GROUND TAKEN IN THE REVENUES APPEAL I S SET ASIDE TO THE FILE OF A.O. ACCORDINGLY, GROUNDS IN ASSESSEES CROSS OBJE CTION ARE ALLOWED. 22. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND BOTH THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 26TH NOVEMBER 2012. SD/- SD/- (G.S. PANNU) ACCOUNTANT MEMBER (R.S.PADVEKAR ) JUDICIAL MEMBER PUNE, DATED THE 26TH NOVEMBER, 2012 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT -II, PUNE 4. THE CIT (A) II, PUNE 5. THE D.R. B BENCH, PUNE 6. GUARD FILE /- TRUE COPY-/ BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE