PRAMOD LAKRA, DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), KOLKATA, KOLKATA V. MEENAKSHI MERCANTILES LIMITED, KOLKATA

ITA 2489/KOL/2024

AI Insights

The case involves an appeal by the Revenue against the order of the CIT (A), which had deleted the addition of \\u20b95,71,09,594 on account of disallowance of PMS fees in computing capital gains. The Revenue contended that the PMS fees were not wholly and exclusively incurred in connection with the transfer of capital assets, as required under Section 48 of the Income Tax Act. The assessee, Meenakshi Mercantiles Limited, defended the CIT (A)'s decision, arguing that the PMS expenses were genuine and incurred for generating capital gains. The tribunal, referencing various precedents and the definitions under the RBI Act, supported the assessee's position, leading to the dismissal of the Revenue's appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 473791 (ITAT-KOLKATA)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2022-2023
• Other Referred Cases: Sanjay Sawhney vs. Principal Commissioner of Income-tax, Mafatlal Holdings Ltd. Vs. Additional commissioner of income tax, Principal Commissioner of Income-tax-4, Ahmedabad vs. Sintex Industries Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAILEN SAMADDER
• Assessee Lawyers: S. K. TULSIYAN; LATA GOYAL; ARS
• Keywords: Set aside; Business income; Capital asset; Reassessment proceedings; Business expenditure; Question of law; Commercial expediency; Capital expenditure; Capital Gains; Audit objection
• Section: 48; 153C; 37; 37(1); 101

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, KOLKATA BEFORE SHRI RAJESH KUMAR, AM AND SHRI PRADIP KUMAR CHOUBEY, JM ITA No.2489/KOL/2024 (Assessment Year:2022-23) DCIT, Circle-11(1), Kolkata Aayakar Bhawan, 6thFloor, P-7, Chowringhee Square, Kolkata, West Bengal, 700069 Vs. Meenakshi Mercantiles Limited Room No 504, Woodburn Central, 5A,Bibhabati Bose, Sarani Kolkata, WestBengal-700020 (Appellant) (Respondent) PAN No. AADCM1113E Assessee by : Shri S.K. Tulsiyan, & Smt. Lata Goyal, Ars Revenue by : Shri Sailen Samadder, DR Date of hearing: 19.03.2025 Date of pronouncement : 02.04.2025 O R D E R Per Rajesh Kumar, AM: This is an appeal preferred by the Revenue against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 28.06.2024 for the AY 2022-23. 02. At the outset, we observe from the appeal folder that there is a delay of 101 days in filing the appeal by the Revenue for which the condonation petition was moved stating the reasons for delay in filing the appeal. After perusing the contents of the condonation petition filed by the Revenue, we observe that the delay is attributable to the time taken in obtaining various administrative approvals in the Page | 2 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 administrative hierarchy. It is mentioned in the condonation petition that due to heavy rush of scrutiny reports, audit objections and order giving effects, a lot of time was taken. Considering the reasons as cited by the Revenue as bonafide and sufficient, we condone the delay in filing the appeal and admit the same for adjudication. 03. The revenue has challenged the appellate order passed by the ld. CIT (A), wherein the ld. CIT (A) deleted the addition of ₹5,71,09,594/- on account of disallowance of PMS fees in computing the capital gain by ignoring the Provisions of Section 48 of the Act as per which the expenses which are not wholly and exclusively incurred in connection with transfer of capital assets are not deductible in computing the capital gain and ignoring the fact that PMS fees is indirectly related to equity or derivative transactions. 04. The assessee has also filed an application under Rule 27 of ITAT Rules, challenging the dismissal of ground no.1 by ld. CIT (A) while finally the ld. CIT (A) deleted the addition made by the AO by holding, the PMS expenses to be genuine and are allowable while computing capital gain. 05. After hearing the rival contentions and perusing the materials available on record, we find that the ground no.1 raised by the assessee before the ld. CIT (A) challenging the assessing of the total income of ₹85,90,28,764/- against the return income of ₹80,19,19,170/- is without jurisdiction, erroneous and bad in law. The assessee has not filed any appeal or cross objection against the dismissal of the said ground, however, raised the issue under Rule 27 of the ITAT Rules. For the sake of ready reference, the said rule is reproduced as under for ready reference:- Page | 3 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 “Respondent may support order on grounds decided against him.” 27. The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him. 06. We observe that Rule 27 of the ITAT Rules provides an opportunity to the respondent, where it has not filed any appeal or cross objection before the Tribunal to support the order of ld. CIT (A) on an ground decided against him by the ld. Commissioner of Income-tax (Appeals). The ld. CIT (A) stated that the said ground is general in nature and therefore does not require any adjudication as the issue raised by the appellant have been disposed off in the subsequent Para on merit of the case and accordingly, dismissed. 07. In our opinion, the assessee is within its legitimate and lawful rights to challenge the dismissal of the ground by way of application under Rule 27 of the ITAT Rules and is entitled to defend the order of ld. CIT (A) on all grounds including grounds which have been decided against it. The case of the assessee is squarely covered by the decision of Hon'ble Delhi High Court in the case of Sanjay Sawhney vs. Principal Commissioner of Income-tax [2020] 116 taxmann.com 701 (Delhi)/[2020] 273 Taxman 332 (Delhi)[18-05-2020], wherein the Hon'ble Court has held as under:- “26. The upshot of the above discussion is that Rule 27 embodies a fundamental principal that a Respondent who may not have been aggrieved by the final order of the Lower Authority or the Court, and therefore, has not filed an appeal against the same, is entitled to defend such an order before the Appellate forum on all grounds, including the ground which has been held against him by the Lower Authority, though the final order is in its favour. In the instant case, the Assessee was not an aggrieved party, as he had succeeded before the CIT (A) in the ultimate analysis. Not having filed a cross objection, even when the appeal was preferred by the Revenue, it does not mean that an inference can be drawn that the Respondent- assessee had accepted the findings in part of the final order, that was decided against him. Therefore, when the Revenue filed an appeal before the ITAT, the Appellant herein (Respondent before the Tribunal) was entitled under law to defend the same and support the order in appeal on any of the grounds decided against it. The Respondent-assessee had taken the ground of maintainability before Commissioner (Appeals) and, therefore, in the appeal filed by Page | 4 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 the Revenue, it could rely upon Rule 27 and advance his arguments, even though it had not filed cross objections against the findings which were against him. The ITAT, therefore, committed a mistake by not permitting the assessee to support the final order of CIT (A), by assailing the findings of the CIT(A) on the issues that had been decided against him. The Appellant - assessee, as a Respondent before the ITAT was entitled to agitate the jurisdictional issue relating to the validity of the reassessment proceedings. We are, therefore, of the considered opinion that the impugned order passed by the ITAT suffers from perversity in so far as it refused to allow the Appellant - assessee (Respondent before the Tribunal) to urge the grounds by way of an oral application under Rule 27. The question of law as framed is answered in favour of the Appellant - assessee and resultantly the impugned order is set aside. The matter is remanded back before the ITAT with a direction to hear the matter afresh by allowing the Appellant- assessee to raise the additional grounds, under Rule 27 of the ITAT Rules, pertaining to issues relating to the assumption of jurisdiction and the validity of the reassessment proceedings under section 153C of the Act.” 08. We also note that the facts relating to the above said issue as raised by the assessee under rule 27 are already available in the assessment and appeal folder. Further, the ld. CIT (A) has already recorded a finding that expenditure incurred as PMS expense is allowable as deduction since, it is genuine expenses incurred for generating the capital gains and incurred wholly and exclusively in connection with such transfer. Since, the assessee is a NBFC engaged in the business of investment activity as well as trading of securities, any expenditure incurred on account of PMS expenses shall be allowed as business of investment in shares and securities business segment. The assessee is indisputably is a Non-Banking Financial company and is engaged in the business as such. The principal activities are to provide inter- corporate loans and business of investing in equity instruments, debt instruments and mutual funds etc. as per the copy of Memorandum of Association (MoA), which is available at page no. 62 to 75 of the Paper Book-II . The main object clause in MoA is as extracted as under :- “The object clause of MoA, Clause III(A)(3) at page 66 of P/B II reads as under: \"To act as an investment and to carry on business of leasing and hire purchase, investment in shares and securities sick-industries Rehabilitation, Bridge- financing, Bill Page | 5 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 discounting. International capital market operations, money market, operations, share financing, venture capital finance and such other interrelated activities of lending money, financing industrial enterprises, borrow money, accepting deposits and loans.\" 09. We note that the registration certificate issued by the RBI to the assessee is available at page no. 76 to 77. We also note that as per the registration certificate issued to the assessee company subject to continuance of adherence to all the conditions and parameters stipulated under Chapter IIIB of the RBI Act, 1934 except to accept/ hold public deposits money thereby that assessee company is not allowed to accept/ hold public deposits. We also note from the registration certificate issued by the RBI dated 13th March, 2008, which is available at page no. 76 to 81 of the paper book. On page no. 78, the non-banking financial institutions and their activities have been defined under section 45-I Chapter IIIB of RBI Act, 1934. The business of non-banking company has been defined as carrying on business of financial institutions referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f). We note from the clause (c), which defines the financial institution to mean any non-banking institution which carries on as its business or part of its business any of the following activities namely i) the financing , whether by way of making loans or advances or otherwise , of any activity other than its own; ii) the acquisition of shares, stock, bonds, debentures or securities issued by govt. or local authority or marketable securities of a like nature. In clause (f) a non-banking financial institution has been defined to mean “ i) financial institution which is a company; ii) a non banking financial institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner or lending in any manner ; iii) such other non banking institution or class of such institution , as the bank may, with the previous approval Page | 6 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 of the Central Govt and by notification in the official Gazette , specify.” . Thus, we find from the perusal of the above registration certificate and the definitions given under the RBI Act, the RBI Act allows the assessee to carry on business of acquisition of shares, stocks, bonds, debentures or securities issued by the Govt or local authority or other marketable securities of like nature. Once, such business is allowed to be carried on by the assessee then the incurring of expenses which are wholly and exclusively in connection with such business would be allowable expenses to the assessee from the said business. The issue raised before us is with regard PMS expenses incurred by the assessee which represented the fee paid to the portfolio managers who are handling the investment business of the assessee. The assessee has both segments business as well as investment segment and claimed these expenses from the securities which were under investment segment into shares and securities and not in the business of investments into shares and securities. Now, the assessee claims that since the said expenses were wholly and exclusively incurred in connection with the business of the assessee into investments into shares and securities, therefore the commercial expediency demand that same are to be allowed as business expenditure while computing the business income of the assessee. 010. Even in order to examine whether a expenditure is wholly and exclusively incurred for the purpose of business , the same has to view from angle of commercial expediency. The commercial expediency refers to those transactions /expenditures which are not required to be incurred under any provisions of the Law but refers to such expenditures which a prudent businessman incur for the purpose Page | 7 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 of business. In other words such expenditures might not have been incurred under any obligation but same are allowable as business expenditure on the ground of commercial expediency. The Hon’vle Apex Court in the case of S.A.Builders Ltd. Vs CIT(A) Chandigarh (2007) 288 ITR 1(SC) has held that commercial expediency is an expression of wide import and includes such expenditures as aprudent business man incur for the purpose of business though not incurred under any legal obligation yet allowable as business expenditure out of commercial expediency. 011. Even the ld. CIT (A) has treated this PMS expenses to be genuine and bonafide and noted that these fund managers are regulated authorized entities by the SEBI to render the specialized services. The case of the assessee is squarely covered by the decision of the co- ordinate bench in the case of Mafatlal Holdings Ltd. Vs. Additional commissioner of income taxITA No. 2935/Mum/2002(2004) 85 TTJ 0821dated 23.04.2003, wherein the assessee company was engaged in the business of financing and investment and during the year it borrowed money for its business and claimed the deduction of interest on deposits u/s 36(1)(iii) of the Act. The ld. AO noted that the assessee has not given out any new finances during the accounting year relevant to assessment year under consideration, however the company increased its investment as compared to earlier assessment years and according to the ld. AO the entire funds available with the company have been mainly invested in the shares of the group companies and group partnership firms only. The ld. AO referred to the profit and loss account of the assessee and stated that the assessee was having income from dividend and long term investments which has been taxed as income from other sources and profit on sale Page | 8 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 of long term investments which has taxed as capital gain and income did not include any business income or operational income and therefore, the ld. AO concluded that there was no business activity, yet the assessee company debited an expense of Rs. 1,76,64,882 out of which the interest paid is Rs. 1,74,12,682 and accordingly, disallowed the interest on the ground that no business activity was carried on during the preceding year. The Hon'ble Tribunal while deciding the issue has held as under:- “18. The various Court cases relied upon by the learned Departmental Representative are not relevant to the facts of the present case. In the case of Oriental Investments Co. Ltd. (supra), the Hon’ble apex Court held that the mere fact that the company has within its objects the dealing in the business of investment in shares, does not give to the company the characteristics of a dealer in shares, but if other circumstances are proved, it may be relevant for the purpose of determining the nature of the activities of the company. In the present case, the assessee-company actually carried out business activity during the year under consideration, which can be evidenced from the balance sheet for the financial year ending on 31st March, 1998. It could be observed from the balance sheet that there were various business transactions carried on by the assessee-company during the financial year of the nature of selling its investments, utilisation of the opening cash and bank balances, procuring unsecured loans during the financial year and utilisation of the said funds for its business purposes. Thus, the assessee-company had carried on the activities of all the ingredients of investment and finance company. Thus, the assessee-company was not only having its objects in dealing with the investment shares but there were other circumstances as stated above which proved undoubtedly that the assessee-company was an investment company. Therefore, the above Supreme Court decision has moreover supported the case of the assessee-company that the company was actually dealing in the business of investment in shares. In the case of Challapalli Sugars Ltd. (supra), the Hon’ble Supreme Court laid down that, if the interest paid on the amount borrowed for acquiring and installing machinery and plant for a period prior to commencement of production, the same would actually form part of the actual cost of machinery and plant. In the present case as we have discussed above in detail, the assessee-company carried on the business as a investment company during the year under consideration. The assessee-company had carried on the activities of the nature of purchase and sale of shares, had earned dividend income and had also incurred various business expenditure like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., which have also been allowed by the AO. Therefore, the interest expenditure incurred by the assessee is also allowable under the provisions of s. 36(1)(iii) as the assessee-company was in fact carrying on the business activities during the year under consideration. In the case of Ace Investments (P) Ltd. (supra), the Madras High Court has held \"that the mere presence of the objects clause would not be sufficient to hold that the assessee was carrying on moneylending business. It Page | 9 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 was clear on the facts that the amounts advanced were short-term advances and they were advanced only to the fourteen trusts. The assessee had not advanced money to any other person. The rate of interest charged was 6 per cent which the Tribunal considered low when compared to the market rate of the interest prevalent at the time. Moreover, the interest was collected only after the payment of the principal sum. The Tribunal also found that the persons to whom the advances were made were closely connected with the assessee. There was no systematic or organised activity carried on by the assessee in dealing with the money. Therefore, the Tribunal was right in holding that the income of the assessee could not be regarded as income derived from moneylending business and it was derived from the deposits or investments made.\" In the present case, the company carried on the business activities during the year under consideration; there were also various business transactions as we have stated above. The assessee procured unsecured loans during the financial year and these sums were utilised for the purpose of the business of the assessee. The assessee-company also made investments in shares and also earned dividend income, therefore, it cannot be said that the assessee-company made short-term advances. It also cannot be said that the assessee-company was not carrying on the business systematically or in an organised manner. The assessee-company was carrying on the business as an investment and finance company and these activities of the company were systematic. Therefore, the facts of the above case of the Madras High Court are not relevant to the facts of the present case. In the case of Brooke Bond & Co. Ltd. (supra), the Hon’ble Calcutta High Court held that the dividend earned by the assessee-company from investments in shares of companies carrying on tea business would never be said to be part of its business income because investment in shares were not incidental to the assessee’s business activities and they were not held as trading assets. But in the present case, the main business of the assessee was investment in shares. The assessee-company carried on the activities in respect of all the ingredients of an investment and finance company. Therefore, the main business of the assessee was to deal in investments and hence, the dividend income earned by the assessee was income from the main business carried on during the relevant assessment year. The facts of the abovesaid case are not relevant to the facts of the present case because in the abovesaid case the assessee was earning the dividend income from its investment in shares, which was not the part of the business income of the assessee. In the case of Rajendra Prasad Moody (supra), the Hon’ble Supreme Court held that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as deduction under s. 57(iii) of the IT Act, 1961 in computing its income from dividend under the head \"income from other sources\". We do not find any relevance of this case to the facts of the present case. In the present case, the question of deduction under s. 57(iii) of the Act does not arise because in the present case deduction has to be allowed under the provisions of s. 36(1)(iii) or under s. 37(1) of the Act. The dividend income earned by the assessee is out of its investment in shares and this is the main activity of the assessee-company. Therefore, the dividend income earned during the year is income of the assessee from business and not income from other sources. In view of the discussion above, the disallowance made by the tax authorities is not justified. We, therefore, allow the claim of allowance of interest payment as business expense and the disallowance made by the AO and confirmed by the CIT(A) is deleted. As we have allowed the claim of the assessee (supra), therefore, the alternative claim made by the learned counsel, does Page | 10 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 not require any consideration. These grounds of appeal are, therefore, decided in favour of the assessee.” 012. Similarly the Hon'ble Gujarat High Court in the case of Principal Commissioner of Income-tax-4, Ahmedabad vs. Sintex Industries Ltd. [2018] 403 ITR 418 (Gujarat)[04-05-2017] has decided the issue in favour of the assessee , wherein the Hon'ble Gujarat High Court has held as under:- “10. Now so far as Question [B] is concerned, it appears that the Assessing Officer made disallowance of expenditure of Rs. 24,37,500/= incurred towards Consultancy charges. The Assessing Officer made disallowance under Section 37 of the Act, treating the same as capital expenditure. However on appeal, the learned CIT [A] deleted the disallowance made by the Assessing Officer by observed that the expenditure incurred by the assessee towards Consultancy charges was purely revenue in nature and therefore was allowable expenditure. The aforesaid finding and observation has been confirmed by the learned Tribunal by making observations in par-42, as under :— \"42. We have duly considered rival contentions and gone through the record carefully. No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the investment, then how the assessee will get this set off. Therefore, the learned CIT [A] has rightly observed that the expenses were not incurred towards purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the learned CIT [A]. This ground of appeal is rejected.\" 11. Considering the aforesaid facts and circumstances of the case when the assessee incurred expenses towards consultancy charges in order to make investment, the Assessing Officer was not justified in treating and considering the expenses incurred towards consultancy charges as capital expenditure, disallowable under Section 37 of the Act. Under the circumstances, the learned Tribunal has rightly deleted the disallowance of Rs. 24,37,500/= incurred by the assessee towards consultancy charges. We are in complete agreement with the view taken by the learned Tribunal.” 013. Considering the facts of the case of the above decision, we are inclined to hold that the PMS expenses incurred by the assessee by way of fee to the portfolio managers has to be treated as expenses wholly and exclusively incurred in connection with the business of the assessee and therefore, are allowable u/s 37 of the Act. So far as the Page | 11 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 decision relied on by the ld DR in the caser of Devendra Motilal Kothari Vs Deputy Commissioner of Income Tax ITA No. 1356/Mum/2008 order dated 26.03.2010, we find the same to be rendered in the context of whether the PMS fee was deductible in computing capital gain. But since we have allowed the issue raised by the assessee in Rule 27 of the ITAT Rules , the decision of the coordinate bench is not applicable to the facts as we have held that PMS Fee is allowable as business expenses u/s 37 of the Act. Since, we have allowed the issue raised by the assessee under Rule 27 of ITAT Rules, the appeal of the Revenue become infructuous and is accordingly, dismissed. 014. In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 02.04.2025. Sd/- Sd/- (PRADIP KUMAR CHOUBEY) (RAJESH KUMAR) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Kolkata, Dated: 02.04.2025 Sudip Sarkar, Sr.PS Page | 12 ITA No.2489/KOL/2024 Meenakshi Mercantiles Limited; A.Y. 2022-23 Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Kolkata "